The   Gold  Supply  and 
Prosperity 


Compiled    and     Edited     by 

Byron     W.     Holt 

Editor  of  Moody's  Magazine 


Published  by 

The    Moody    Corporation 

35  Nassau  Street,  New  York 
19  0  7 


Copyright  1906,  by 

THE  MOODY  CORPORATION 

All  rights  reserved 


h- 


THE    MOODY-BARTON    PRESS 
ELIZABETH,    N.J. 


7t 


CONTENTS 


\ 


Page 

I.  INTRODUCTION— The  Problem  Stated v 

II.  THE  QUANTITY  THEORY  OF  MONEY 17 

BRONSON  C.  KEELER,  Writer  on  Financial  and 

Economic   Subjects,  Los  Angeles,  Cal. .' 19 

GEORGE  M.  COFFIN,  Vice-President  Phenix  Na- 
tional Bank,  New  York 31 

^  IRVING  FISHER,  Prof,  of  Political  Economy  at 

Yale  University,  New  Haven,  Conn 35 

MAURICE  L.  MUHLEMAN,  Ex-Deputy  Assistant 

Treasurer  of  the  United  States,  New  York  City  39 
HENRY  FARQUHAR,  Statistician  and  Writer  on 

Economic  Subjects,  Washington,  D.  C 41 

A.    J.    WARNER,    President    American    Bimetallic 

Union,    Gainesville,    Ga 45 

E.  W.  KEMMERER,  Prof,  of  Political  Economy  in 

Cornell  University,  Ithaca,  N.  Y 49 

III.  THE  WORLD'S  GOLD  PRODUCTION 

A.  SELWYN-BROWN,  C.  E.,  B.  Sc,  Mining  Ex- 
pert and  Authority,  New  York  City 53 

IV.  THE  INCREASING  SUPPLY  OF  GOLD— Its 
Effect  Upon  Prices,  Wages,  Interest,  Securities, 
Etc 75 


\ 


MAURICE  L.  MUHLEMAN,  Ex-Deputy  Assistant 

Treasurer  of  the  United  States 87 

JOHN  B.   CLARK,  Prof,  of  Political  Economy  at 

Columbia  University,  New  York  City 93 

WALTER  S.  LOGAN,  Lawyer.  Writer  and  Speaker 

on   Scientific    Subjects ' 99 


38900':' 


CONTENTS 


Page 

FRANK   A.    VANDERLIP,   Vice-President   of   the 

J  National  City  Bank  of  New  York 113 

■»  IRVING  FISHER,  Prof,  of  Political  Economy  at 

Yale  University,  New  Haven,  Conn 121 

ELLIS  H.  ROBERTS,  Ex-Treasurer  of  the  United 

States,  Utica,  N.  Y ' 133 

/^HORACE  WHITE,  Ex-Editor  New  York  Evening 

Post;  Author  of  Many  Books,  New  York  City. .      143 
JOHN     DEWITT     WARNER,     Ex-Congressman; 
Author  and  Writer  on  Economic  Subjects,  New 

York    City 151 

L.  CARROLL  ROOT,  Treas.  American  Cities  Rail- 
way &  Light  Co.,  Author  and  Writer  on  Money 

and  Currency,  New  York  City 157 

ROBERT  GOODBODY,  Member  New  York  Stock 

V  Exchange,  New  York  City 163 

JOSEPH    FRENCH    JOHNSON,    Dean    of    New 
York  University  School  of  Commerce,  Finance 

and  Accounts,  New  York  City 173 

JAMES  R.  BRANCH,  Secretary  American  Bankers' 

.,^^  Association,    New  York   City 181 

GEORGE  H.  SHIBLEY,  President  Bureau  of  Eco- 
nomic Research.  Author  and  Writer,  Washing- 
ton.   D.   C 185 

V.  CONCLUSION— Including  Much  New  Matter  on 
the  Quantity  Theory  of  Money,  Prices  of  Bonds 
and  Stocks,  Gold  Depreciation,  Literature  of  the 
Fifties,  Etc.. 193 

INDEX 258 


Preface 

The  first  (December,  1905)  number  of  Moody's 
Magazine  contained  a  symposium  on  the  effects  of  the 
increasing  supply  of  gold  upon  prices,  interest  rates, 
industry,  etc.  Both  because  of  the  able  men  who  con- 
tributed to  this  symposium  and  the — to  most  men — 
novel  theory  advanced  by  many  of  the  contributors, 
that  more  gold  means  not  only  continuously  rising 
prices,  but  rising  or  high,  rather  than  low,  interest 
rates ;  and  the  fact,  as  was  clearly  shown,  that  the 
values  of  investments  are  rapidly  changing  as  a  result 
of  the  depreciation  in  the  standard  of  value,  there  was 
such  a  demand  for  this  number  of  the  magazine  that 
the  supply  was  exhausted  before  the  end  of  December. 
The  demand  for  the  "Gold  Symposium"  number  con- 
tinuing unabated,  together  with  the  many  evidences 
manifested  of  the  growing  interest  of  investors  in  this 
vital  question,  it  was  decided  to  republish  the  Gold 
Symposium  in  book  form. 

Not  only  have  the  statistics  published  in  connec- 
tion with  the  symposium  been  brought  down  to  date, 
but  much  new  material  has  been  added.  The  "Quan- 
tity Theory  of  Money,"  as  viewed  by  some  of  our 
ablest  economists  and  thinkers,  is  given  careful  con- 
sideration. "The  World's  Production  of  Gold,"  by  A. 
Selwyn-Brown,  an  expert,  forms  an  important  part  of 
the  book.  Much  new  matter  as  to  prices  of  bonds  and 
stocks  has  also  been  added,  which  not  only  amplifies 
the  data  presented,  but  which  demonstrates  that,  in 
practice,  events  are  proceeding  in  accordance  with  the 
theories  advanced  by  most  of  the  contributors  to  the 
Gold  Symposium.  B.  W.  H. 


Introduction 

THE  PROBLEM  STATED 

During  the  campaign  of  1896  and  the  previous  two 
or  three  years,  when  the  appreciation  of  gold  was  the 
chief  topic  of  discussion  in  political  and  financial  cir- 
cles and  when  "Coin's  Financial  School"  was  causing 
millions  of  debtors  to  believe  that  an  appreciating  dol- 
lar was  silently  but  surely  robbing  them,  by  compelling 
them  to  pay  in  commodities  much  more  than  was 
stipulated  in  their  bonds,  many  active  and  trained 
minds  were  earnestly  studying  the  problem  to  see 
what  truth  there  was  in  the  statements  of  "Coin"  Har- 
vey, Hon.  W.  J.  Bryan,  Dr.  E.  Benjamin  Andrews,  Hon. 
George  Fred.  Williams,  Hon.  A.  J.  Warner,  Herbert 
Clark,  Hon.  Charles  A.  Towne  and  others  who  were 
teaching  and  preaching  of  the  injustice  of  the  robber 
gold  dollar. 

Many  able  and  conscientious  men  attempted  to 
expose  the  fallacies  back  of  "16  to  1"  and  "bimetal- 
ism."  Some  of  them  denied  that  the  gold  dollar  was 
appreciating.  They  did  not  deny  that  prices  were  fall- 
ing, but  they  said  that  wages  were  rising  and  that, 
measured  by  both  prices  and  wages,  the  purchasing 
power  of  the  dollar  was  about  stable.  Some  denied 
that  the  decline  in  prices  was  due  to  a  scarcity  of 
money  and  claimed  that,  with  modern  methods  of  do- 
ing business,  (largely  by  credits),  an  immense  busi- 
ness could  be  done  with  comparatively  little  money — 


vi  INTRODUCTION 

providing  the  money  was  absolutely  sound;  that  is, 
providing  it  had  the  confidence  of  the  business  world. 
Such  men  virtually,  if  not  actually,  argued  that  the 
quantity  is  of  less  importance  than  the  quality  of 
money  in  determining  prices. 

INTEREST  RATES  AS  A  BALANCE    W^HEEL 

Others,  of  whom  the  writer  is  one,  reached  the 
conclusion  that  even  if  gold  were  appreciating,  when 
tested  by  prices,  a  compensating  force  was  at  work 
which  was  partly,  if  not  entirely,  nullifying  the  thiev- 
ish tendencies  of  the  dollar.  This  force,  or  factor,  was 
preventing,  in  part,  at  least,  the  appreciating  dollar 
from  silently  abstracting  wealth  from  debtors  and 
turning  it  over  to  creditors. 

This  factor  is  the  rate  of  interest  which  constitutes 
a  part  of  every  contract  in  defeired  payments.  Put  in 
its  simplest  form  this  compensating  force,  factor,  or 
law,  may  be  stated  as  follows: 

1.  When  the  dollar  is  appreciating — that  is,  when 
prices  are  falling — the  rate  of  interest  on  deferred  pay- 
ments is  either  falling  or  low. 

2.  When  the  dollar  is  depreciating — that  is,  when 
prices  are  rising — the  rate  of  interest  on  deferred  pay- 
ments is  either  rising  or  high. 

These  statements  should  not  be  taken  too  literally. 
They  represent  tendencies  rather  than  laws.  Thus,  if 
prices  are  falling  at  an  average  rate  of  3%  a  year  the 
tendency  is  for  the  (money)  rate  of  interest  to  be  3% 
below  the  normal  rate  with  stable  prices.  If  prices  are 
rising  at  an  average  rate  of  3%  a  year  the  tendency  is 


INTRODUCTION  vii 

for  the  (money)  rate  of  interest  to  be  39^  above  the 
normal  rate  with  stable  prices.  In  practice,  the  inter- 
est rate  is  seldom  or  never  fully  adjusted  to  the  chang- 
ing value  of  money.  It  is  only  in  a  long-continued  rise 
or  fall  that  the  money  rate  is  greatly  affected.  Even 
then,  the  change  in  rate  is,  apparently,  seldom  more 
than  half  sufficient  to  counteract  the  change  in  the 
purchasing  power  of  the  unit  of  value. 

Thus,  there  was  a  general  downward  tendency  of 
both  prices  and  interest  rates  from    1873   to    1896  or 
1897.     Since__±8.97j,  there  has  been  a  pronounced  up- 
ward tendency  of  both  prices  and  interest  rates.     In 
point  of  time  the  changes  in  interest  rates  follow  some 
distance  behind  the  changes  in  prices,  and  the  changes 
in  prices  some  distance  behind  the  changes  in  the  quan- 
tity of  gold.    Thus,  although  the  output  of  gold  began 
to  increase  in  1888,  and  was  increasing  rapidly  from 
1890  to   1892,  yet  prices  declined  until   1896  or   1897, 
whiTF the  interest  rate  (except  for  a  reaction  in  1894, 
from  the  panic  rates  of  1893)  continued  to  decline  until 
1897  or  1898. 
Vy         As  suggested  above,  this  theory  of  the  equilibrat- 
ing action  of  interest  rates  was  discovered  by  several       ^.^ 
thinkers,   independently  of   each  other.     Prof.    Irving      f- 
Fisher,  of  Yale  University,  was  one  of  the  first  mo3ern     '  / 
writers  to  carefully  consider  this  theory.     His  article        ^ 
in  the  Bond  Record  of  April,  1896,  not  only  stated  the         J 
theory  in  full  but  verified  it  somewhat  by  statistics  of 
interest  rates  in  this  and  other  countries..    He  sum- 
marized his  conclusions  in  this  way : 

"In  short,  all  the  facts  go  to  show  that  the  rate 
of  interest  tends  to  adjust  itself  to  the  appreciation  or 


I< 


viii  INTRODUCTION 

depreciation  of  the  monetary  standard  in  such  a  man- 
ner as  to  correct  in  large  measure  those  gains  or  losses 
I  to  the  contracting  parties  which  would  otherwise  arise 
'  from  variations  in  the  purchasing  power  of  money.'' 

His  little  volume,  "Appreciation  and  Interest," 
published  in  August,  1896,  was  very  full  and  complete 
on  this  subject.    In  it  he  said: 

"Here  the  effort  will  be  to  show  that  losses  due 
to  'appreciation,'  however  defined,  will  tend  to  be  fore- 
stalled. For  this  it  is  not  necessary  to  scale  the  prin- 
cipal of  a  debt.  The  principal  is  not  the  only  or  even 
the  chief  element  in  a  loan  contract.  The  other  ele- 
ment is  the  rate  of  interest." 

Professor  John  B.  Clark,  in  the  Political  Science 
Quarterly  of  June,  1896,  stated  the  theory  as  follows: 

"If,  with  a  currency  of  perfectly  stable  value,  the 
interest  on  loans  is  5%,  corresponding  to  the  earnings 
of  real  capital,  then  a  gain  in  the  purchasing  power  of 
the  currency  of  1%  a  year  has  the  effect  of  reducing 
nominal  interest  to  4%.  The  debtor  then  really  pays 
and  the  creditor  really  gets  the  same  percentage  as 
before  of  the  actual  capital  loaned." 

These  two  professors,  though  not  the  first  to  pro- 
pound the  theory,  were  perhaps  the  first  to  grasp  and 
state  the  great  importance  of  the  fact  that  interest  acts 
as  a  balance  wheel  on  the  value  of  money  used  in  de- 
ferred payments — tending  to  keep  the  present  worth 
of  a  debt  always  about  the  same,  regardless  of  great 
changes  in  the  value  of  the  principal. 


INTRODUCTION 


PROBLEM  REVERSED  IN  If 


As  is  evident  from  the  preceding  statements  the 
wheels  of  progress  (as  to  gold,  silver,  prices,  interest 
rates,  debtors,  creditors,  etc.)  reversed  themselves  in 
1896,  1897  and  1898,  when  gold  began  to  depreciate 
and  silver  to  appreciate ;  when  prices  and  interest  rates 
began  to  advance;  and  when  the  poor,  plundered 
debtor  got  on  top  of  the  rich,  grasping  creditor  and 
began  to  rob  the  robber.  Such  good  use  is  the  debtor 
now  making  of  his  opportunity  that  he  has,  in  ten 
years,  got  back  all  that  was  taken  from  him  in  fifteen 
years.  He  has  a  "strangle  hold"  on  the  unfortunate 
creditor  and  may  be  expected  to  keep  him  down  until 
he  gives  up  all  that  is  worth  taking. 

The  "Cross-of-Gold  and  Crown-of-Thorns"  speech 
would  not  fit  today.  Either  the  cross  would  have  to 
be  made  of  silver  or  it  would  have  to  be  transferred 
from  the  once  poor  debtor  to  the  present  poor  creditor. 
Instead  of  the  gold  dollar  being  "the  most  inhuman, 
cruel,  murderous  dollar  which  any  quarter  of  century 
in  the  world's  history  has  produced,"  as  the  Hon. 
George  Fred.  Williams  designated  it,  this  same  gold 
dollar  is  now  the  most  honest,  humane  and  beneficent 
dollar  the  world  ever  saw — that  is,  if,  according  to  the 
theories  of  Coin's  Financial  School,  a  depreciating  dol- 
lar is  as  good  as  an  appreciating  dollar  is  bad. 

In  any  case  the  problem  of  today  is  the  converse 
of  that  of  1896  and  previous  years.  Instead  of  an  ap- 
preciating dollar,  with  declining  prices  and  interest 
rates,  we  now  have  a  rapidly  depreciating  dollar,  with 
rising  prices  and  interest  rates.     Silver,  struck  down 


X  INTRODUCTION 

by  the  "Crime  of  '73,"  has  again  Hfted  up  its  head  and 
has  risen  more  than  50%  in  price  (from  46  cents  an 
ounce,  in  1902,  to  71  cents,  in  1906)  during  the  last 
four  years. 

It  is,  however,  practically  certain  that  the  problem 
of  a  declining  is  no  easier  of  solution  than  is  that  of  a 
rising  dollar.  It  may  be,  and  probably  will  be,  found 
that  the  evils  of  a  depreciating  dollar  are  more  real  and 
vexatious  and  fraught  with  greater  danger  to  society 
than  were  the  evils, — largely  imaginary — of  an  appre- 
ciating dollar.  It  may  be  found  that,  even  more  than 
an  appreciating  one,  the  depreciating  dollar  takes  from 
him  that  hath  not  to  give  to  him  that  hath ;  that, 
especially,  does  it  result  in  decreasing  the  share  of  the 
product  that  goes  to  labor.  That  is,  it  results  in  the 
cost  of  living  rising  more  rapidly  than  wages.  It 
may  also  be  found,  as  is  claimed  by  several  professors, 
that  much  of  the  present  world-wide  discontent,  crime 
and  radicalism  can  be  traced  to  the  insidious  influence 
of  depreciating  money  and  rising  prices.  It  may  be 
that,  as  suggested  by  Professor  Norton  of  Yale,  we  will 
soon  have  government  commissions  to  inquire  into  the 
causes  and  effects  of  the  decline  in  the  purchasing 
power  of  the  world's  standard  of  value,  and  to  suggest 
means  either  of  regulating  the  production  and  value  of 
gold  or  of  getting  rid  of  gold  and  substituting  some 
other  standard  of  value.  It  may  be  that  we  shall  see, 
during  the  next  decade,  a  world-wide  agitation  against 
gold  that  will  make  the  "16-to-r'  agitation  of  1896  and 
the  greenback  and  bimetallic  agitations  of  previous 
years,  appear  insignificant. 


INTRODUCTION  xi 

These  are  only  suggestions  of  some  of  the  dynamic 
possibilities  to  industry,  politics  and  society  that  may 
lie  hidden  in  a  depreciating  standard  of  value.  The 
effects  that  more  directly  concern  us  and  that  are  both 
more  certain  and  easier  of  solution  are  those  upon 
prices  and  interest  rates  and,  through  these,  upon 
investments  and  incomes.  It  is  with  these  effects  that 
our  contributors  have  mainly  dealt  and  because  of  them 
that  this  book  is  published.  These  are  the  important 
effects  that  now  confront  investors  and  all  men  of 
affairs. 

WHAT  MAY  HAPPEN 

During  the  last  decade  prices  have  risen  about 
50^.  Property  and  income  values,  throughout  the 
entire  world,  have  been  greatly  altered.  During  this 
decade  the  world's  stock  of  gold  has  increased  50%. 
But  in  this  decade  many  important  countries  have 
adopted  gold  as  their  standard  of  value,  thus  creating 
a  demand  for  much  of  this  surplus  gold. 

Suppose,  as  is  probable,  that  the  world's  gold  sup- 
ply should  increase  50  or  100%  during  the  next  decade 
and,  suppose,  as  is  also  probable,  that  no  important 
country  should,  in  that  time,  change  from  a  silver,  cop- 
per or  paper  to  a  gold  standard ;  is  it  not  possible  and 
even  probable,  that  prices  would  advance  even  more 
rapidly  than  during  the  last  decade?  Suppose  that,  as 
some  expect,  prices  should  advance  at  an  average  rate 
of  10%'  a  year  and  that,  in  1917,  they  should  be  200% 
higher  than  now.  Think  what  a  revolution  would  have 
taken  place  in  values?    Cotton  would  then  be  selling  at 


4j 


V   xii  INTRODUCTION 

30  cents  a  pound;  corn  $1.50  and  wheat  $3  a  bushel; 
eggs,  $1  a  dozen;  poultry  50  to  75  cents  per  pound; 
steak  60  cents  a  pound;  hard  coal  $20  a  ton;  shoes  $10 
a  pair;  sugar  15  cents  a  pound;  brick  $20  a  thousand; 
lumber  from  $100  to  $200  a  thousand;  and  other  things 
in  proportion. 

But  would  the  prices  of  other  things  be  propor- 
tionately high?  We  know  that  such  would  not  be  the 
case.  In  this  fact  there  are  many  little  and  big  jokers 
that  will  play  havoc  with  values  and  upset  the  world's 
industries  and,  possibly,  its  governments.  Not  only 
will  the  prices  of  commodities  rise  unevenly,  articles 
of  necessity  and  in  which  speculation  is  easily  possible 
advancing  most  rapidly  in  prices,  as  a  rule,  but  wages 
will  fall  far  behind  in  the  race.  Comparatively  speak- 
ing, prices  will  go  up  on  an  elevator  while  wages  will 
climb  the  stairs. 

But  what  of  the  prices  and  rates  charged  by  pub- 
lic-service corporations?  What  of  3-cent  and  5-cent 
car-fares,  80-cent  gas  and  2-cents-a-mile  passenger 
fares?  What  of  freight  rates?  The  most  of  these  are 
fixed  or  regulated  by  state  and  national  governments. 
It  will  be  no  easy  matter  to  get  them  raised.  Not  until 
some  of  these  corporations  give  up  their  charters  and 
others  are  on  the  verge  of  bankruptcy  will  the  people, 
in  most  cases,  consent  to  have  fares,  rates  and  prices 
raised.  Tom  Johnson  will  hardly  have  gotten  his 
3-cent  fare  lines  into  full  operation  before  the  cost  of 
carrying  passengers  will  actually  exceed  3  cents;  soon 
after  it  may  exceed  5  cents ;  in  a  few  years  more  it 
may  exceed  10  cents. 


INTRODUCTION  xiii 

As  certain  as  night  follows  day,  will  there  soon  be 
much  trouble  and  tribulation  for  the  stock  and  bond 
holders  of  our  railroad,  street  railway,  gas,  electric 
light,  telephone  and  telegraph  corporations,  if  gold 
continues  to  decline  rapidly  in  value  and  interest  rates 
to  rise. 

This  is  the  great  problem  that  now  confronts  the 
financial  world  and  demands  solution  of  every  in- 
vestor. Not  to  solve  it,  may  mean  great  loss  and,  pos- 
sibly, failure.  To  solve  it,  means  success  and  greatly 
enhanced  wealth  for  all  who  now  either  have  a  fair 
share  of  this  world's  goods  or  who  have  credit  and  can 
intelligently  go  in  debt  for  a  large  amount. 

Business  men  are  only  just  beginning  to  realize 
that  something  unusual  is  happening  in  the  value  and 
price  world.  But  few  have,  as  yet,  got  their  eyes  open 
to  the  prime  cause  of  the  great  changes  that  are  occur- 
ring. Still  fewer  have  any  clear  or  comprehensive 
idea  of  the  far-reaching  effects  proceeding  from  the 
rapid  decline  in  the  purchasing  power  of  gold.  That 
these  effects  may  be  revolutionary  in  the  financial,  in- 
dustrial, economic,  political  and  social  world  is,  per- 
haps, beyond  tHe  imagination  of  any  but  a  very  few 
men.  Have  not  prices,  wages  and  values  been  com- 
paratively stable  in  the  past  hundreds  of  years?  What 
nonsense  to  suppose  that  any  changes  in  the  standard 
of  value  would  seriously  affect  ethics,  politics  and  soci- 
ety !  In  spite  of  theorists  and  dreamers  is  it  not  safe 
to  conclude  that  this  old  world  will,  in  the  future  as  in 
the  past,  proceed  on  an  even  keel? 


xiv  INTRODUCTION 

This  is  about  the  way  the  ordinary  man  of  affairs 
thinks  and  talks  of  the  problems  suggested  by  the  in- 
creasing quantity  of  gold.  He  is,  in  fact,  the  dreamer 
and  will  not  awaken  to  the  rapidly  changing  conditions 
in  the  investing  and  business  world  until  he  is  hit  hard 
and,  perhaps,  kicked  and  pounded.  He  has  held  bonds 
while  they  have  declined  10,  20  or  30%  in  price  and 
he  has  no  clear  idea  of  the  cause  of  the  decline.  He 
imagines  that  the  decline  is  only  temporary  and  that 
prices  will  soon  begin  to  recover  and  will  some  day 
be  as  high,  and  perhaps  higher,  than  ever  before.  He 
sees  some  stocks  rising  rapidly  and  others  declining 
sharply  without  realizing  that  there  is  a  fundamental 
cause  that  accounts  for  many  of  these  changes, 
whether  up  or  down.  He  considers  himself  a  good 
judge  of  values  and  advises  his  friends  to  buy  bonds 
now  when  they  are  cheaper  than  ever  before  and  to 
sell  stocks  that  have  gone  up  30,  50  or  100  points  in 
the  last  few  years.  He  is  judging  the  future  by  the 
past.  Ordinarily  his  advice  would  be  good.  He  does 
not  realize  that  we  are  now  entering  upon,  and  even 
passing  through,  an  era  that  has  no  counterpart  in  the 
past. 

While  the  contributors  to  the  gold  symposium 
touch  but  lightly  ypon  some  of  the  effects  and  prob- 
lems growing  out  of  the  increasing  supply  of  gold, 
some  of  them  do  open  up  many  questions  of  great 
importance  to  business  men.  No  business  man  can  af- 
ford not  to  read  these  articles  and  many  others  that 
will  undoubtedly  appear  on  this  subject  during  the 
next  year. 


INTRODUCTION  xv 

THE  QUANTITY  THEORY  OF  MONEY 

While  practically  all  economists  agree  that  the 
quantity  theory  of  money  has  some  force ;  that  is,  that 
more  money  tends  to  cause  prices  to  rise  and  less 
money  tends  to  cause  them  to  fall,  yet,  unfortunately, 
there  is  no  general  agreement  as  to  the  relation  be- 
tween money  and  prices  or,  indeed,  as  to  what  kinds 
of  money  and  what  kinds  of  commodities  have  influ- 
ence in  fixing  prices. 

As  this  question  is  fundamental  and  must  be  con- 
sidered, when  theorizing  and  prophesying  as  to  what 
will  be  the  effects  of  increasing  gold  production  and 
supply,  considerable  space  has  been  given  to  a  discus- 
sion of  this  subject.  Copious  extracts  are  reprinted 
from  a  symposium  on  this  subject  in  Moody's  Maga- 
zine of  September,  1906.  This  discussion  precedes  the 
discussion  of  the  effects  of  the  increasing  supply  of  gold. 
It  is  necessarily  somewhat  academic  and  didactic.  It 
is,  however,  so  essential  a  factor  in  the  problem  that  it 
could  not  be  entirely  disregarded.  Those  who  think  it 
safe  to  assume  that  more  gold  means  higher  prices, 
and  that,  other  things  being  equal,  there  is  a  somewhat 
close  relation  between  prices  and  the  quantity  of  gold 
in  the  monetary  world,  may  prefer  to  omit  the  reading 
of  this  discussion. 


The  Quantity  Theory  of  Money 

npHE  six  articles  immediately  following  appeared  as  a 
■*■  symposium  in  Moody's  Magazine  for  September, 
1906.  They  are  here  reprinted  in  full,  except  that 
about  one-third  of  Mr.  Keeler's  article  is  omitted.  The 
occasion  of  the  symposium  was  the  following  letter 
sent  to  some  fifteen  or  more  authorities  on  money  and 
prices.  In  fairness  to  Mr.  Keeler  it  should  be  said 
that  his  article  was  contributed  to  Moody's  Magazine 
without  any  idea  that  it  would  form  any  part  of  a 
symposium : 

"Mr.  Bronson  C.  Keeler,  of  St.  Louis,  has  written 
an  article  for  publication  in  Moody's  Magazine  which 
brings  up  at  least  two  very  important  questions.  (1) 
The  quantity  theory  of  money.  (2)  Accepting  the 
quantity  theory,  what  is  money? 

"Mr.  Keeler  accepts  the  quantity  theory.  He 
holds  that  the  price  of  money,  as  of  commodities,  is 
determined  by  supply  and  demand.  He,  however, 
makes  the  price  formula  as  follows : 


in  which  m  represents  the  number  of  units  in  the  com- 
modity fund,  V  the  average  velocity  of  circulation  and 
c  the  volume  of  the  commodity  offered  for  sale.  He 
says  that 

17 


18  GOLD  SUPPLY  AND  PROSPERITY 

"  'Bank  credits,  uncovered  paper  money,  and  simi- 
lar expedients,  are  not  money,  although  often  so  called. 
They  are  velocity  of  circulation.' 

"Apparently  he  does  not  limit  the  original  money, 
standard-of-value  money,  to  gold,  or  to  the  precious 
metals,  or  even  to  things  having  intrinsic  value.  'It  is 
not  necessary,'  he  says,  'that  the  standard  of  value 
should  possess  utility,  or  even  tangibility.  Its  essen- 
tial is  that  it  should  effectually  control  the  issue  of 
paper  money.' 

"Reference  to  several  authorities  on  money  indi- 
cate that  there  are  indeterminate  factors  both  as  to 
money  and  commodities.  Just  now,  when  prices  are 
rising,  supposedly  because  of  the  rapidly  increasing 
quantity  of  gold,  it  is  extremely  important  that  some 
sort  of  an  understanding  be  reached,  if  possible,  as  to 
what  constitutes  money  and  commodities,  in  their 
price-determining  functions.  Will  you  not  kindly  state 
briefly,  for  Moody's  Magazine,  your  answers  to  the 
following  questions? 

"1.  To  what  extent  are  prices  determined  by  the 
supply  of  and  demand  for  money? 

"2.  What  kinds  of  money  count  in  fixing  prices? 

(a)  One  or  more  intrinsic-value  moneys? 

(b)  Representatives  of  intrinsic-value  money? 

(c)  Credit  currency — bank  notes,  checks,  etc.? 

(d)  Fiat  money,  if  made  legal  tender  and  re- 
stricted as  to  issue? 

(e)  Fiat  money,  if  unrestricted? 

"3.  What  kinds  of  commodities  count  in  making  a 
demand  for  money  and  in  fixing  price? 


THE  QUANTITY  THEORY  OF  MONEY  19 

(a)  All  goods  produced? 

(b)  All  goods  exchanged? 

(c)  All  goods  sold  for  cash? 

(d)  All  goods  sold  for  cash  or  credit? 

"4.  To  what  extent  are  prices  affected  by  the 
rapidity  of  circulation  of  money  and  what  instruments 
affect  rapidity  of  circulation? 

"5.  To  what  extent  are  prices  affected  by  the 
rapidity  of  exchange  of  commodities? 

"A  general  will  be  as  acceptable  as  a  categorical 
answer  to  these  questions." 

By  Rroxsox  C.  KeeIvER 

The  denial  of  the  quantitative  theory  of  money 
will  one  day  take  its  place  in  the  museum  of  intel- 
lectual curiosities  alongside  the  denial  of  the  spher- 
icity of  the  earth;  since  both  propositions  are  self-evi- 
dently  true  to  any  man  who  will  look  at  the  surface 
facts  dispassionately.  Yet  both  have  required  elabo- 
rate demonstration,  and  I  have  seen,  in  this  month  of 
July,  1906,  the  quantitative  theory  denied  in  the  edi- 
torial columns  of  one  of  the  greatest  daily  papers  in  the 
United  States.  For  generations  it  was  admitted  by 
all;  and  it  was  the  exigencies  of  political,  and  not  of 
economic,  debate  which  first  brought  abdut  its  rejec- 
tion. Prof.  Henry  Dunning  Macleod,  a  learned  but 
fervid  English  writer,  first  led  the  way ;  and  he  was 
followed  by  zealous  imitators,  who  equaled  him  in 
hysteria  but  not  in  erudition. 

The  increasing  output  of  the  gold  mines,  and  the 
profound    rearrangement    it    is    having    upon    values 


20       GOLD  SUPPLY  AND  PROSPERITY 

throughout  the  world,  render  the  subject  of  pressing 
importance  at  this  time. 


STANDARD  OF  VALUE 

It  was  a  notable  saying  of  John  Law,  "Money  is 
not  that  for  which  wealth  is  exchanged ;  it  is  that  by 
which  wealth  is  exchanged" 

The  standard  of  value,  then,  is  some  one  thing  by 
which  all  other  things  are  exchanged.  Anything  can 
be  used  as  a  standard  that  the  people  will;  and  shells, 
beads,  tobacco  and  many  other  things,  as  well  as  gold 
and  silver,  have  been  so  employed.  It  is  only  neces- 
sary that  the  people  should,  for  any  reason,  act  to- 
gether in  making  all  commodities  exchangeable 
through  that  one  thing.  Experience  has  shown  that  if 
government  declares  anything  to  be  a  legal  tender  for 
debt,  that  action  will,  of  itself,  cause  that  thing  to  be- 
come a  standard  of  value.  And  this  is  the  method  now 
employed  by  governments  in  establishing  a  standard 
of  value.  Paper  answers  quite  as  well  as  anything 
else,  but  for  the  difficulty  in  controlling  the  amount. 
The  object  of  stamping  the  money  function  on  the 
precious  metals  is  to  limit  the  issue,  to  keep  the 
numerator  of  the  fraction  more  constant. 

Money  is  any  measure  of  value  which  acts  as  a 
medium  of  exchange. 

A  standard  of  value  need  not  necessarily  circulate. 
Its    representative,    paper    money    redeemable    in    the 


THE  QUANTITY  THEORY  OF  MONEY     21 

standard,  may  circulate  instead.  Indeed,  Ricardo  de- 
clares that  one  function  of  a  standard  of  value  is  to 
determine  how  much  paper  money  shall  be  issued. 
A  measure  of  value,  on  the  contrary,  must  circulate 
It  cannot  be  a  measure  unless  it  does. 

Nor  is  it  necessary  that  the  standard  of  value 
should  possess  utility,  or  even  tangibility.  Its  essen- 
tial is  that  it  should  effectually  control  the  issue  of 
paper  money.  The  distance  from  here  to  the  sun 
could  be  made  the  standard.  Suppose  that  we  assume 
that  distance  to  be  one  hundred  million  miles,  that  we 
issue  that  many  paper  notes,  each  representing  one 
mile,  each  note  called  a  dollar,  and  declare  them  a  legal 
tender.  Prices  would  adjust  themselves  to  this  money, 
sales  would  be  made,  and  debts  would  be  contracted. 
But  as  human  ingenuity  increases  the  means  of  pro- 
duction, prices  would  tend  to  fall,  because,  while  com- 
modities increased,  there  would  be  no  increase  in  the 
standard,  and  no  increase  in  the  volume  of  money. 
Suppose  that  it  were  apparent  that  the  volume  of  com- 
modities having  doubled,  prices  would  fall  one-half. 
This  would  benefit  creditors  and  injure  debtors. 

EQUALITY  BETWEEN  DEBTORS  AND  CREDITORS 

The  question  would  arise :  Who  was  entitled  to 
this  increase  in  the  purchasing  power  of  money,  the 
debtor  or  the  creditor?  The  debtors  would  claim  it, 
on  the  ground  that  if  things  remained  in  statu  quo 
they  would  repay  twice  the  purchasing  power  that 
they  borrowed ;  and  they  would  urge  that  the  volume 
of   notes   be   doubled,   making   them   200,000,000,   and 


22       GOLD  SUPPLY  AND  PROSPERITY 

each  note  representing  one-half  a  mile.  This  would 
cause  the  purchasing  power  of  each  note  to  remain  un- 
changed, and  would  preserve  the  equities  of  the  case, 
so  far  as  debtors  were  concerned.  But  the  creditors 
would  say  that  when  they  made  the  loans,  they  did 
not  lend  purchasing  power,  but  a  definite  amount  of 
the  standard;  and  they  would  object  that  they  were 
being  wronged,  in  that  the  government  was  about 
to  put  only  half  as  much  distance  in  the  dollar  as  was 
in  it  at  first. 

Or,  suppose,  on  the  contrary,  that  the  volume  of 
commodities  should  decrease  as  compared  with  the 
volume  of  money,  say  one-half;  and  that  prices  should 
double,  so  that  a  dollar  would  buy  only  one-half  as 
much  as  it  would  before.  This  would  injure  creditors 
and  help  debtors.  The  creditors  might  propose  a  re- 
duction in  the  number  of  outstanding  dollar  bills  to 
one-half,  to  50,000,000,  making  each  bill  represent  two 
miles,  but  maintaining  the  purchasing  power  of  each 
one  to  its  former  efficiency.  This  would  maintain  the 
equities  of  the  case,  so  far  as  they  were  concerned. 
But  the  debtors  would  object.  They  would  claim  that 
what  they  had  borrowed  was  not  purchasing  power, 
but  the  standard  of  value;  and  that  they  would  be 
wronged  by  the  proposed  change,  as  they  would  have 
to  pay  back  twice  as  much  distance  as  they  had  re- 
ceived from  the  creditors. 


DEMAND,  SUPPLY  AND  PRICE 

Having    determined    the    relations    between    the 


THE  QUANTITY  THEORY  OF  MONEY     23 

standard  of  value,  the  measure  of  value,  and  money, 
it  will  be  seen  that  while 


is  the  ratio  at  which  ^11  exchange  for 


Value  a  commodity another  commodity 

Price  a  commodity. money. 


While  the  value  equation  is  v   =  ,   the  price 

s 
m 
equation    becomes  p  = ;     that    is,    price     equals 

c 

money  divided  by  commodities.  The  two  equations 
are  identical,  except  for  the  necessary  change  in  tech- 
nical terms,  and  the  definition  given  above  of  value  is 
applicable  to  price ;  both  being  the  quotient  obtained 
by  dividing  demand  by  supply,  and  expressing  the  re- 
sult in  terms  of  demand.  In  the  price  equation,  money 
is  the  demand,  or  that  through  which  demand  voices 
itself;  commodities  are  the  supply;  and  price  is  the 
quotient. 

To  deny  the  quantitative  theory  of  money,  to  as- 
sert that  the  amount  of  money  in  use  is  not  a  determin- 
ing factor  in  prices,  is  to  assert  that  the  size  of  a 
numerator  has  nothing  to  do  with  the  amount  of  the 
quotient. 

A  most  important  point  to  be  noted  is  the  differ- 
ence between  value  and  price,  itself  a  corollary  of  the 
quantitative  theory  of  money,  lying  in  the  fact  that 
while  there  can  never  be  a  general  rise  or  a  general 
fall  in  values,  there  can  be  a  general  rise  or  a  general 


24       GOLD  SUPPLY  AND  PROSPERITY 

fall  in  prices.  This  is  due  to  the  fact  that,  in  value,  all 
commodities  exchange  for  all  commodities,  and  an 
illustrating  figure  would  be  a  lattice  work;  while,  in 
price,  all  commodities  are  exchanged  by  one  thing, 
money,  and  an  illustrating  figure  would  be  a  hub  with 
spokes  converging  into  it  from  all  directions. 

Each  country  in  the  world  receives  its  distributive 
share  of  an  international  standard  of  value,  and  that 
share  constitutes  the  measure  of  value  of  the  property 
offering  for  exchange  in  that  country.  Each  com- 
munity receives  its  distributive  sliare  of  the  country's 
share,  and  each  man  in  the  community  receives  his  dis- 
tributive share  of  the  community's  share. 

DISTRIBUTION  OF  MONEY  AND  COMMODITIES 

These  distributive  shares  are  divided  into  com- 
modity-funds, a  certain  percentage  of  the  total  being 
used  as  the  measure  of  the  several  commodities  ex- 
changed. Thus,  in  an  average  community,  about  15% 
of  the  money  goes  for  rent,  and  constitutes  the  rent- 
fund;  about  45%  for  food,  about  15%  for  clothing, 
about  5%  for  fuel,  and  so  on.  These  commodity  funds 
vary  from  season  to  season,  and  from  minute  to  min- 
ute. They  may  be  formed  instantly,  as  when  a  man 
suddenly  sees  something  new  which  his  fancy  impels 
him  to  buy  on  the  spot;  and  they  flow  from  one  to 
another  readily.  What  in  winter  constitutes  the 
heavy-underwear-fund,  in  summer  may  go  into  the 
fresh-vegetable-fund,  or  the  ice-cream-fund.  When  at 
10.32  a.  m.,  June  26,  1906,  5,000  bushels  of  July  wheat 
sold  in  the  Chicago  wheat  pit  for  8154  cents  a  bushel. 


THE  QUANTITY  THEORY  OF  MONEY     25 

it  was  because  at  that  instant  there  were  at  that  point 
$4,075  in  the  wheat-fund  and  5,000  bushels  willing  to 
exchange  at  that  price.  And  when,  two  minutes  later, 
10,000  bushels  sold  at  81^  cents,  it  was  because,  with 
telegrams  pouring  in  from  all  over  the  world,  there 
were,  at  that  instant,  $8,162.50  in  the  wheat-fund  press- 
ing for  the  purchase  of  wheat  at  that  price.  Both  the 
demand  and  the  supply  had  increased,  but  the  demand 
had  increased  faster  than  the  supply,  the  numerator  of 
the  fraction  had  grown  faster  than  the  denominator, 
and  the  price  rose.  If,  in  New  York  City,  today,  10,825 
chocolate  eclairs  sell  for  one  cent  each,  it  is  because 
the  confection  makers  know,  from  experience,  that 
there  are  about  $108.25  in  the  chocolate  eclair  fund 
there. 

In  general,  at  any  time,  at  any  given  point,  the 
price  at  which  a  commodity  sells  is  determined  by  the 
amount  of  money  in  that  commodity-fund  divided  by 
the  quantity  of  that  commodity  offered  for  sale.  The 
division  is  performed  by  the  interplay  of  demand  and 
supply;  by  what  Adam  Smith  called  "the  higgling  of 
the  market." 

A  moment's  reflection  will  satisfy  any  practical 
man  that  these  commodity-funds  are  real  entities  and 
not  theoretical.  Every  congress  or  legislature,  in  pass- 
ing an  appropriation  bill,  recognizes  their  existence; 
otherwise,  the  same  amount  of  money  would  be  set 
apart  for  each  item,  as  much  for  cuspidors  as  for  a 
Panama  canal.  What  man  of  mature  years  has  not  sat 
down  to  estimate  the  next  year's  expenses,  and  in 
thus  doing  has  allowed  so  much  for  this,  so  much  for 


26       GOLD  SUPPLY  AND  PROSPERITY 

that,  according  to  his  attained  income?  When  he  did 
these  things,  he  recognized  the  existence  of  the  com- 
modity-funds and  the  quantitative  theory  of  money. 
A  second  reflection  will  convince  a  man  that  while 
these  commodity-funds  differ  from  time  to  time,  and 
under  varying  circumstances,  they  yet  bear  a  certain 
fixed  ratio  one  to  another.  For  example,  the  clothing- 
fund  will  always  be  larger  than  the  black-pepper-  fund. 
And  a  third  reflection  will  convince  him  that  each  com- 
modity-fund in  a  community  bears  a  ratio  more  or  less 
fixed  to  that  community's  distributive  share  of  money. 
Statistics  also  confirm  this  abundantly.  If  the  value 
of  money  changes  either  way,  relatively  to  the  volume 
of  commodities,  the  percentages  will  remain  the  same, 
and  therefore  prices  must  change  correspondingly, 
otherwise  the  money  would  not  be  in  the  community's 
distributive  share. 

These  facts  of  every  day  observation  prove  the 
quantitative  theory  of  money. 

VELOCITY  OF  CIRCULATION 

However,  the  volume  of  money  in  use  is  not  the 
number  of  pieces  in  circulation;  but  what  John  Stuart 
Mill  called  "the  efficiency  of  money" ;  which  is  the 
number  of  units  in  circulation  multiplied  by  the  aver- 
age velocity  of  circulation  of  each  unit.  A  one-dollar 
piece,  passing  from  hand  to  hand  ten  times  in  one  day, 
does  as  much  work  as  a  ten-dollar  piece  changing 
hands  but  once  in  a  day.  The  efficiency,  therefore,  is 
represented  by  the  term  vm,  meaning  thereby  the  aver- 
age velocity  of  each  measure  multiplied  by  the  num- 


THE  QUANTITY  THEORY  OF  MONEY     27 

ber  of  measures.     Every  price  equation,  therefore,  is 

vm 

expressed,  p  = ,  in  which  p  stands  for  price,  v  for 

c 
average  velocity  of  circulation,  m  for  the  number  of 
money  units  in  the  commodity-fund,  and  c  for  the 
volume  of  the  commodity  offering  for  sale.  Or,  p  may 
stand  for  the  average  price  level  of  the  community  or 
of  the  country,  vm  the  efficiency  of  the  measure  of 
value,  and  c  the  total  volume  of  commodities  offering 
for  sale. 

This  is  what  those  financial  writers  have  had  in 
mind  who  said  that  the  amount  of  money  in  use  was 
not  the  determining  factor  in  prices.  They  meant  that 
even  with  a  smaller  amount  of  legal  tender  money  in 
use,  if  the  velocity  of  circulation  were  increased  cor- 
respondingly, prices  would  not  change.  Technically 
this  is  true;  but  they  have  never  stated  their  case  cor- 
rectly, and  they  have  ignored  the  fact  that  money  pre- 
cedes velocity,  and  that  quality  of  circulation  is  better 
than  velocity. 

If  their  theory  were  correct,  it  would  be  absurd 
for  government  to  coin  so  much  money.  It  should  coin 
only  one  piece,  and  let  that  circulate  rapidly  enough  to 
prevent  a  fall  in  prices. 

BANK  NOTES  AND  CREDITS  INCREASE  CIRCULATION 

When  a  bank  with  a  legal  tender  dollar  on  deposit 
issues  one  paper  note  against  it,  and  that  paper  note 
passes  from  hand  to  hand,  it  creates  a  simple  velocity 
of  circulation;  so-called,  because  only  one  man  can 
use  the  same  dollar  at  the  same  time.     It  is  a  velocity 


28       GOLD  SUPPLY  AND  PROSPERITY 

of  ond-to-one.  But  when  a  bank  issues  four  paper 
dollars  against  one  legal  tender  dollar,  as  the  law 
permits  with  us,  it  creates  a  compound  velocity  of  cir- 
culation, because  four  men  can  use  the  same  dollar  at 
the  same  time,  and  the  velocity  of  circulation  is  four- 
to-one.  Bank  credits,  uncovered  paper  money,  and 
similar  expedients  are  not  money,  although  often  so 
called.    They  are  velocity  of  circulation. 

Any  velocity  of  circulation  above  the  normal  aver- 
age tends  to  raise  prices,  no  matter  how  it  may  be  at- 
tained. But  no  rise  in  prices  can  produce  a  monetary 
crisis,  if  the  rise  is  caused  by  a  velocity  of  circulation 
of  one-to-one  and  without  mortgage  indebtedness;  for 
each  debt  is  extinguished  with  each  passing  of  the 
money.  But  a  rise  in  prices  caused  by  a  compound 
velocity  of  circulation  can  cause  a  panic,  because  there 
is  always  present  the  indebtedness  at  the  bank,  and 
very  often  a  further  indebtedness  created  by  the  buyer 
in  addition.  That  is,  the  purchaser  often  pays  the 
equity  with  a  debt  at  bank,  and  creates  a  subsidiary 
debt  besides. 

Whether  bank  notes,  bank  checks,  drafts,  etc., 
tend  to  raise  prices  depends  entirely  on  whether  or 
not  they  increase  the  velocity  of  circulation,  and  this 
can  only  be  told  by  an  examination  of  each  individual 
case.  This  is  why  the  discussion  of  this  question,  pro 
and  con,  has  been  so  indeterminate. 

The  world  never  had  a  monetary  crisis  until  Pater- 
son  invented  the  compound  velocity  of  circulation. 

Prof.  Macleod  once  said  that  he  had  never  seen  a 
banker  who  could  define  his  own  business,  meaning  by 
"banker"  an  officer  in  a  bank  of  issue ;  and  then  he 


THE  QUANTITY  THEORY  OF  MONEY 


29 


dropped  the  subject  without  giving  the  definition  him- 
self, A  bank  cannot  be  defined  as  a  house  that  lends 
money.  A  money  lender  does  thai.  Nor  as  a  house 
that  discounts  paper.  A  note  shaver  does  that.  Nor 
as  a  place  where  money  can  be  left  for  safe  keeping. 
A  safety  deposit  vault  does  that.  A  bank  is  an  institu- 
tion that  is  permitted  by  law  to  create  a  compound 
velocity  of  circulation  of  money. 

Before  leaving  this  subject  it  may  be  well  to  note 
the  different  conditions  under  which  changes  in  price 
will  occur  by  the  quantitative  operation  of  money. 
They  are  disclosed  in  the  following  table : 

QUANTITY  OF  MONEY  AND  PRICES 


If  the  volume  of 
money,  the  numer- 
ator of  the  fraction, 


and  if  the  volume  of  com- 
modities, the  denomina- 
tor of  the  fraction 


Prices  will 


1 

1 

Increases               i 

increases  equally 

increases  taster-- 

1 

decreases. 

Remains  stationary    ', 

1 

remains  stationary 

decreases. 

1 

remain  stationary 

fall 

rise 

rise 

fall 

remain  stationary 

rise 

remains  stationary fall 

decreases  equally remain  stationary 

decreases  faster rise 

increases fall 


It  will  be  seen  from  the  last  column  of  the  table 
that  there  are  eleven  price  resultants  possible  under 
the  different  conditions  of  demand  and  supply :  four  in 
which  prices  rise,  four  in  which  they  fall,  and  three  in 
which  they  remain  stationary. 


30  GOLD  SUPPLY  AND  PROSPERITY 

GOLD   PRODUCTION    AND   PRICES 

Whether  the  increasing  output  of  gold  from  the 
mines,  now  under  way,  is  to  result  in  a  constant  rise  in 
prices  for  a  series  of  years,  will  depend  upon  whether 
the  production  of  commodities,  under  the  improved 
methods  of  machinery  and  under  the  stimulus  of 
greater  profits  from  the  rising  prices,  will  not  increase 
commensurately  with  the  production  of  gold.  If  the 
average  price  level  continues  to  rise,  it  will  be  proof 
positive  that  the  volume  of  money  is  increasing  faster 
than  the  volume  of  commodities.  If  the  average  price 
level  remains  stationary,  it  will  indicate  that  the  pro- 
duction of  commodities  has  overtaken  the  supply  of 
money.  And  if  the  average  price  level  falls,  it  will 
indicate  that  the  volume  of  commodities  is  increasing 
faster  than  the  volume  of  money.  The  wise  investor 
will  note  carefully,  all  the  time,  the  output  of  the  mines 
and  a  standard  index  number.  If  gold  production  con- 
tinues to  increase,  and  the  general  price  level  con- 
tinues to  rise,  he  will  dispose  of  his  bonds  and  mort- 
gages, and  invest  the  money  in  property.  But  when 
the  gold  production  falls  off,  he  will  sell  his  property, 
anticipating  a  fall  in  prices,  and  will  invest  the  funds 
in  contracts  calling  for  the  payment  of  specific  sums  of 
money — such  as  bonds  and  mortgages. 


Volume  of  Money  Determines  Prices 

\\\   CjKdkck  AI.  Coffin 

A  NSWERING  your  questions  in  a  general  way,  I 
'^^  think  that  the  volume  of  money  in  circulation  in 
any  country  has  a  decided  influence  on  the  prices  of  all 
commodities  measured  in  money;  and,  inversely,  that 
the  prices  of  money  measured  in  commodities  is  also 
influenced  by  the  supply  of  money.  And  this  because 
the  prices  of  money  and  all  other  commodities  are  sub- 
ject to  the  universal  law  of  supply  and  demand,  which 
causes  them  to  act  and  react  on  each  other. 

By  money  I  mean  any  kind  of  coin  or  paper  cur- 
rency not  covered  by  coin  issued  either  by  the  Govern- 
ment or  the  banks  (for  instance,  U.  S.  notes  and  na- 
tional bank  notes)  which  has  the  purchasing  power  of 
coin,  even  when  not  redeemable  in  coin,  as  in  the 
United  States  from  1861  to  1879. 

Gold  itself  is  a  commodity  used  in  the  arts  and 
sciences,  but  most  largely  as  the  standard  money  of 
commerce  and  the  ultimate  measure  and  test  of  re- 
demption of  other  kinds  of  money,  because  it  is  rela- 
tively scarce,  and  has  certain  inherent  or  intrinsic 
qualities  of  weight,  non-corrosion,  indestructibility 
and  others  which,  by  the  almost  universal  judgment  of 
mankind,  best  fit  it  to  its  use  as  money.  As  an  illus- 
tration of  the  effect  the  volume  or  quantity  of  various 
kinds  of  money  has  had  on  business  and  prices  in  the 


31 


32 


GOLD  SUPPLY  AND  PROSPERITY 


United  States,  see  the  following  table  showing  the 
stock  of  money  in  circulation  in  1847  and  at  various 
periods  of  financial  stringency  or  panic  occurring 
thereafter,  the  percentage  of  increase  of  money  and  of 
population,  respectively,  between  these  periods,  and 
the  kinds  of  money  constituting  such  increase : 

STATISTICS  OF  MONEY,  ETC.,  FOR  1847  AND  PANIC 
^  YEARS  THEREAFTER  / 


ock  of  Money 

n  the  United 

States. 

(millions  of 
dollars) 

>. 

u- 

.S  c 

age  o 

se  in 
ation 

> 

V  o 

cS-3 
"  "  a 
u  o  o 
Sen 

Kinds  of  Money  Constituting  Increase 

*;•" 

a.    *- 

& 

CO 

1847 

224 

1857 

457 

104 

40 

Gold  and  State  bank  currency  — 
chiefly  gold. 

1873 

752 

66 

48 

Greenbacks  and  National  bank  notes- 
gold  and  silver  at  a  premium. 

1884 

1244 

65 

30 

Gold  chiefly  and  275  million  silver  dol- 
lars.   Specie  payment  resumed  1879. 

1893 

1579 

30 

20 

Gold;  252  million  silver  dollars  and  155 
million  Treasury  notes. 

►  19U3 

2367 

48 

21 

Gold  chiefly  with  212  million  National 
bank  notes. 

My  theory  is  that  the  great  additions  of  money 
of  various  kinds — gold,  silver,  State  bank  notes,  United 
States  notes  and  national  bank  notes — to  the  general 
stock  between  these  periods  so  stimulated  speculation 
agd^  inflatign,  or  increase  of  commodity  prices,  as  to 
produce  panic  and  afterwards  depression  of  prices. 

All  this  because  this  increase  in  stock  of  money 

became  the  basis  for  bank  credits  which  added  checks, 

drafts  and  other  instruments  of  credit  to  the  volume 

.of  the  circulating  medium.     For  example,  every  dollar 


VOLUME  OF  MONEY  DETERMINES  PRICES      33 


of  gold  or  greenbacks  brought  into  New  York  City 
from  outside  and  added  to  the  cash  reserve  of-any 
clearing  house  bank  becomes  the  basis  for  three  (3) 
dollars  of  additional  bank  credits  in  the  form  of  loans, 
or  other  investments. 

Applying  this  rule  to  the  commercial  world  at 
large,  it  can  readily  be  seen  what  effect  on  commodity 
prices  must  be  produced  by  the  annual  addition  to  the 
world's  stock  of  money  of  some  400  million  dollars  of 
gold  taken  from  the  mines  and,  at  the  ratio  of  three  to 
one,  forming  the  basis  for  $1,200,000,000  of  fresh  bank- 
ing credits.  As  prices  rise  the  purchasing  power  of  a 
gold  dollar  decreases,  and  in  this  sense  it  can  be  said 
that  the  price  ofgoldjg^decreasing. 

Statistics  show  that  since  1897,  when  they  were 
quite  low,  commodity  prices  have  increased  about  45%, 
due  chiefly  to  the  large  accession  to  the  stock  of  gold 
nd  national  bank  notes  already  referred  to  in  the  table 
given,  coupled  with  confidence  in  the  ultimate  money 
of  redemption  secured  by  the  practical  establishment 
of  the  gold  standard  in  the  United  States. 

In  Great  Britain,  although  there  has  been  no  great 
addition  to  its  stock  of  silver  coin  and  an  actual  dimi- 
nution in  the  amount  of  uncovered  bank  currency  in 
the  past  60  years,  commodity  priceshave_beeji  influ- 
enced in  the  same  way  as  with  us,  by  an  increasing 
stocky  of  gold,  the  continued  use,  of  such  imcovergd 
bank  currency  as  was_  perpufetedjS^LYears  ag:Q^plus  the 
very  gx'rensi ve  "us^,^  ^lecks.  drahs,  §tc.,  based  on  a 
very  moderate  metallic  reserve,  and  circulating 
through  the  clearing  houses. 


Quantity  Theory  Approved 

By   PRUF.    Jk\i.\g   FlSIlKR 

T  T  is  difficult  to  state  briefly  and,  at  the  same  time, 
definitely  the  causes  which  influence  the  value 
of  money  or  the  level  of  prices.  Much  has  been  writ- 
ten, both  by  the  wise  and  the  foolish,  on  the  subject 
of  the  "quantity  theory  ot  money."  Consequently 
theories  going  by  that  name  are  both  true  and  false; 
and  one  who  states  that  he  believes  in  the  quantity 
theory,  or  does  not  believe  in  it,  is  very  apt  to  be  mis- 
understood. 

NEWCOMB'S    "EQUATION  OF  SOCIETARY  CIRCULATION" 

Correctly  stated,  the  theory  is  certainly  true  that 
the  price  level  in  any  community  is  proportional  to  the 
volume  of  the  circulating  medium,  provided  its  veloc- 
ity  of  circulation  and  the  volume  of  business  trans- 
actions remain  constant.  One  of  the  clearest  as  well 
as  most  elementary  statements  of  this  subject  is  that 
of  the  astronomer,  Simon  Newcornb,  who,  in  his 
"Political  Economy,"  develops  what  he  calls  the  "equa- 
tion of  societary  circulation."  This  states  that  the  vol- 
ume of  the  circulating  medium,  multiplied  by  its  veloc- 
ty  of  circulation,  is  equal  to  the  price  level  multiplied 
by  the  volume  of  business  transactions.  For  a  more 
m.inute  analysis,  the  first  member  of  this  equation  may 

35 


36  GOLD  SUPPLY  AND  PROSPERITY 

be  resolved  into  tfwo  terms,  one  related  to  money 
proper  and  the  other  to  the  volume  of  bank^deposits 
which  form  the  bulk  of  "credit  money.""' 

The  mechanism  represented  by  this  equation  of 
circulation  will  be  different  according  to  the  monetary 
standard  of  the  country — whether  it  is  monometallic, 
bimetallic,  or  consists  of  irredeemable  paper  money. 
In  the  American  system  of  monometalism  there  is 
worked  out  an  economic  equilibrium  between  gold  as 
money  and  gold  in  the  arts,  through  the  alternate  melt" 
ing  or  minting  of  any  excess  of  gold  in  either  of  these 
two  forms,  as  compared  with  the  other.  But  this 
mutual  interplay  is  of  itself  by  no  means  sufficient  to 
determine  the  value  of  money;  for  mathematical  exam- 
ination will  show  that  the  number  of  unknown  quan- 
tities is  greater  than  the  number  of  determining  condi- 
tions. There  is,  therefore,  room  left  for  the  co-work- 
ing of  the  influence  above  mentioned;  namely,  that 
expressed  in  the  equation  of  circulation.  This  formu- 
lates the  influence  on  price-level  of  the  following 
causes:  (1)  the  volume  of  money  proper — gold  and 
gold  certificates,  silver  and  silver  certificates,  subsi- 
diary silver,  minor  coins,  greenbacks  and  bank  notes; 
(2)  the  volume  of  credit  currency,  that  is,  the  sum  of 
the  "individual  deposits"  in  national  and  state  banks 
'available  for  transfer  by  check ;  (3)  the  velocity  of 
circulation  of  money  proper ;  (4)  the  velocity  of  circu- 
lation or  rate  of  turn-over  of  bank  deposits :  (5)  the 
volume  of  business  transacted. 


*  See  an  article  by  the  present  writer  in  the  British  Economic 
Journal,  December,  1897.  "  The  Role  of  Capital  in  Economic  Theory." 
pp,   512-521. 


QUANTITY  THEORY  APPROVED        37 

CREDIT  CURRENCY  DEPENDS  ON  MONEY  PROPER 

A  full  Study  of  these  causes,  and  especially  of  their 
relation  to  each  other,  has  never  been  made.  There 
has  been  much  dispute  as  to  whether  credit  currency 
operates  on  prices  in  the  same  manner  as  money 
proper.  To  this  the  answer  which  we  should  give  is 
that  the  magnitude  of  each  of  them  being  given,  they 
influence  prices  in  precisely  the  same  way,  but  that  the 
magnitude  of  the  bank  deposits  is  dependent  upon  the 
magnitude  of  the  monetary  circulation.  Normally,  the 
bank  deposits  vary  with  the  volume  of  money,  but  the 
connection  between  the  two  is  very  elastic,  especially 
during  periods  of  commercial  upheaval,  when  a  new 
economic  equilihlilLrnjs^being  found. 

The  equation  of  circulation,  when  properly  under- 
stood, shows  that  it  is  not  all  goods  which  tend  to 
''"gnl^f  p^'VT  hut  only  such  goods  as  are  exchanged 
by  rnnnpy  r\r  gl^ecks  (^hich  merely  transfer  bank  de- 
posits). Those  goods  which  change  hands  often  have 
a  greater  influence  on  prices  than  goods  which  change 
hands  seldom. 

An  inviting  field  for  statistical  study  is  offered  by 
the  velocity  of  circulation.  Pierre  d'Essars  has  shown 
that  the  rate  of  turn-overs  of  bank  deposits  varies 
enqnjipusly  in  Europe,  for  instance,  from  160  times  a 
year  in  the  Reichsbank  of  Germany  to  less  than  once 
a  year  in  the  Bank  of  Greece.  Similar  variations  have 
been  fouTnt"b3^the  present  writer  in  this  country.  The 
velocity  of  circulation  for  money  proper  has  never  been 
property  computed.  Judging  from  the  rate  of  turn- 
over among  Yale  students,  it  would  be  something  like 
once  a  week. 


38900'? 


38  GOLD  SUPPLY  AND  PROSPERITY 

It  is  clear  that  the  causes  which  ^vork  upon  the 
price  level  in  any  community  are  complex.  Any  effort 
to  predict  changes  in  price  level  needs  tc  be  based  on  a 
wide  knowledge  both  of  economic  theory  and  of  eco- 
nomic facts.  It  is  safe  to  say,  however,  that  ordinarily 
the  causes  of  the  greatest  importance  a'^e  fluctuations 
in  the  volume  of  business  transacted,  and  in  the  quan- 
tity of  money  proper,  to  which  other  forms  of  money 
will,  in  the  long  run,  ^be^nore_jic  less  proportional.  In 
fhort,  prices  in  gold  countries  depend  chiefly  on  the 
amount  of  business  and  the  amount  of  gold. 


Many  Indeterminable  Factors 

By  Maurice  L.  Muhi.eman 

T  N  the  application  of  the  quantitative  theory  of 
money  and  prices  to  certain  phenomena,  such  as 
the  concurrence  of  low  prices  and  an  over-supply  _£iL> 
rnone3^_as_was  the  case  in  1897,  it  appears  that  another 
factor  must  be  considered.  This  seems  to  be  the  rela- 
tive  activity  or  inactivity  of_ca2ital.  The  term  veloc- 
ity of  circulation  doesnot  embrace  this  factor  except, 
perhaps,  in  an  indirect  and  partial  way.  For  while 
velocity  is  dependent  upon  activity  of  capital  employ- 
ment  it  does  not  measure  the  full  effect  thereof;  and 
without  this  the  extent  to  which  the  money  supply 
affects  prices  seems  indetermitiahle- 

All  the  "kinds  of  money"  mentioned  in  the  list  of 
questions,  "count"  in  this  influence,  although  in  vary- 
ing  degrees.  Of  course,  all  substitute  forms  which  are 
certain  to  procure  gold  on  demand  are  substantially  as 
effective  asgold;  but  even  "fiat  money"  is  not  to  be 
excluded ;  indeed  this  undesirable  form  is  usually  more 
potent  in  its  influence,  so  long  as  accepted,  than_other 
forms. 

Respecting  goods  "all  produced" — the  maximum 
supply — would  no  doubt  count  most  if  determinable; 
but  "goods  exchanged"  make  current  prices,  at  least 
until    the    unexchanged    surplus    becomes    apparent, 

39 


40  GOLD  SUPPLY  AND  PROSPERITY 

Distinctions  between  cash  sales  and  credit  sales  should 
not  be  disregarded,  even  though  the  effect  of  the  dif- 
ference is  probably  not  of  great  importance. 

Rapidity  of  circulation  of  money  and  rapidity  of 
exchange  of  commodities,  are  indicators  of  the  status 
of  the  demand ;  as  such  they  probably  have  indirect 
influence  upon  prices;  the  extent  thereof  does  not  ap- 
pear determinable. 

As  to  instruments  affecting  the  former  it  would 
appear  a  normal  proposition  that  those  forms  of  money 
classifiable  as  "superior" — i.  e.  nearest  to  actual  gold — 
would  exert  the  more  potent  influence ;  yet  this  seems 
open  to  objection;  for  all  the  money  substitutes  have 
such  an  influence.  Here  again,  however,  the  activity 
of  capital,  representing,  of  course,  the  general  credit 
status,  appears  to  operate;  sluggish  exchanges  are  coin- 
cident with  absence  of  credit,  which  affects  the  money 
substitutes;  and  thus  there  may  be  falling  prices  with 
an  ample  gold  supply  for  ordinary  reserve  purposes, 
apparently  negativingthe  quantitative  theory. 


Difficulties  of  the  Quantity  Theory 

By  Henry  Farouiiar 

/^F  all  contested  points  in  economics,  few  or  none 
have  been  so  uncompromisingly  contested  as  the 
quantity  theory  of  money  and  prices. 

In  one  of  the  last  papers  by  the  late  General 
Walker,  that  exceptionally  lucid  and  able  writer 
opened  the  discussion  by  speaking  of  the  theory  as 
incontrovertibly  established — in  fact,  one  of  the  tru- 
isms of  the  science.  Yet  there  are  many  capable  think- 
ers who  treat  the  quantity  theory  as  a  mere  infatua- 
tion, and  hardly  entitled  to  the  consideration  of  ra- 
tional men. 

Strange  as  it  may  appear,  yet  it  is  probably  true 
that  both  sides  are  right;  what  passes  by  the  same 
name  being  an  altogether  different  thing  in  the  mind 
of  the  two  disputants.  General  Walker  was  not  mis- 
taken in  believing  that  the  exchange  power  of  the 
monetary  standard  depends  on  supply  and  demand,  as 
fixedly  and  necessarily  as  does  that  of  everything  else 
to  which  value  attaches ;  for,  whatever  the  mathemat- 
ical statement  of  the  law  may  be,  there  can  be  no  rea- 
sonable doubt  of  the  direction  in  which  it  works; 
prices  rise,  for  example,  with  an  increased  supply,  and 
fall  with  a  reduced  supply,  of  the  money  metal.  But 
the  other  side  is  quite  as  well  justified  in  maintaining 

41 


42       GOLD  SUPPLY  AND  PROSPERITY 

that  certain  current  statements  of  the  law,  by  which 
monetary  supply  and  prices  are  related,  are  mislead- 
ing and  result  in  absurd  conclusions. 

It  has  been  assumed,  as  if  a  necessary  result  of 
the  action  of  supply  and  demand,  that  the  prices  of 
commodities  must  be  directly  proportional  to  the 
number  of  monetary  units  in  circulation ;  from  which 
it  would  follow  that  the  aggregate  purchasing  power  of 
all  circulating  monetary  units  must  be  a  constant,  and 
that  the  purchasing  power  of  each  unit  must  increase 
without  limit,  as  the  number  of  them,  decrease.  These 
conclusions  might  be  accepted  if  there  could  be  but 
one  money,  in  which  all  exchanges  must  be  made ;  but 
it  does  not  hold  in  practice,  because  barter  replaces 
money  exchanges  when  coins  become  scarce.  Thus 
we  have  had  as  money,  "pounds  of  tobacco"  among 
our  early  colonists,  "ponies"  on  our  Indian  frontier, 
"sheep"  and  "bullocks'  among  the  herdsmen  of  the 
plains.  This  makes  it  impracticable  to  formulate 
prices  as  varying  directly  with  number  of  monetary 
units,  and  necessitates  a  more  complicated  formula. 
The  variation,  perhaps,  may  be  proportioned  to  the 
number  of  such  units  plus  some  constant,  so  that  it 
may,  in  no  case,  fall  quite  to  zero. 

The  psychological  element  in  price,  however,  is 
perhaps  incompatible  with  the  satisfactory  expression 
of  it  in  mathematical  terms,  for  price  is  not  merely  the 
expression  of  a  relation  between  present  demand  and 
supply;  it  is  also  an  expression  of  a  belief  as  to  how 
that  relation  will  be  before  the  article  purchased  is 
consumed.     Belief  depends  largely  on  temperament,  in 


DIFFICULTIES  OF  QUANTITY  THEORY  43 

the  individual ;  and  it  is  affected  by  many  not  easily 
calculable  causes,  iii^the  multitii^.  Confidence  is  epi- 
demic and  so  is  panic ;  so  the  dispositroTi  to  speculate 
and  the  disposition  to  hoard.  All  these  dispositions, 
pervading  the  people  in  general,  influence  prices,  and 
by  their  influence  vitiate  any  conclusion  we  may  draw 
from  the  most  skilfully-devised  formula.  Any  law  of 
prices,  therefore,  must  be  taken  with  the  proviso 
"other  things  being  equal,"  and  the  clear  understand- 
ing that  other  things  are  quite  likely  to  be  not  equal. 


Quantity  Theory  Unqualified 

By  Hon.  A.  J.  Warner 

T^OU  ask  to  what  extent  are  prices  determined  by 
the  supply  of  and  demand  for  money? 

It  would  be  a  correct  answer  to  say — entirely. 

Money  on  the  one  side  to  buy  with,  and  things  to 
be  bought  and  sold  on  the  other,  determine  how  much 
money  shall  be  given  for  this  or  that  thing,  and  that 
constitutes  price. 

But  What  is  Money?  The  late  Francis  A.  Walker 
in  defining  Money,  said:  "That  is  money  which  does 
the  work  of  money."    I  know  of  no  better  definition. 

DEFINITIONS  OF  PRICE  AND  VALUE 

,       Price  and  Value,  however,  are  not  the  same. 

\^       The  value  of  one  thing  is  another  thing  for  which 

\^  >r  it  will  exchange  even.     Value,  therefore,  is  always  a 

/y     ratio  between  two  or  more  things,  or,  as  defined  by 

>\^      Macleod,    '.^A^^ratio   between    two    or   moreecgjioiRie- 

^      quantities."  ^  - — ^^  ~ 

^  The  value  of  a  thing  in  money  is  price.     Money 

itself,  properly  speaking,  has  no  price.  The  term  price, 
however,  is  often  used  to  denote  interest  for  the  use  of 
money,  but  never,  properly,  to  denote  its  value  in  other 
things,  or  its  purchasing  power. 

The  value  of  one  thing  as  compared  with  another, 
as    one    commodity    compared    with    another,    if    free 

45 


46  GOLD  SUPPLY  AND  PROSPERITY 

from  monopolistic  control,  depends  on  the  law  of  sup- 
ply and  demand;  but  the  values  of  things  in  money 
depend  wholly  on  supply  of  money  as  compared  with 
its  use,  or  the  demand  for  it.  I  know  of  no  other 
factor  entering  into  the  determination  of  price  but 
quantity  of  money,  on  the  one  hand,  and  things  to  be 
exchanged  for  money,  on  the  other.  Hence,  price 
levels  may  go  up  or  go  down  without  affecting  the  rela- 
tive values  of  things  among  themselves;  only  their 
value  in  money,  price,  is  thereby  affected.  Not  that  all 
things  rise  and  fall  evenly  or  exactly  at  the  same  time, 
under  the  influence  of  an  expanding  or  shrinking  vol- 
ume of  money,  but  an  upward  or  downward  movement 
in  price  levels-  sooner  or  later  affects  all  things.  This 
law  was  clearly  stated  by  John  Locliernore  than  a 
hundred  years  ago. 

The  answer  to  your  question,  "What  kinds  of 
money  count  in  fixing  prices?"  is  included  in  the  above 
definition  of  money.  All  kinds,  not  all  to  the  same 
extent  but  all  kinds  to  the  extent  that  each  kind  does 
the  work  of  money. 

For  instance,  if  greenbacks  and  national  bank 
notes  have  the  same  general  acceptance  in  trade  and 
in  the  discharge  of  obligations  that  gold  has,  then 
they  have  the  same  effect  on  prices  as  the  gold  they 
take  the  place  of  would  have. 

So  with  other  forms  of  money.  To  the  extent  they 
take  the  place  of  gold  and  do  the  work  of  gold,  to  that 
extent  they  have  the  same  effect  on  prices.  This  is  a 
well  settled  law. 


QUANTITY  THEORY  UNQUALIFIED  47 

NO  SUCH  THING  AS  INTRINSIC  VALUE 

As  to  "intrinsic  value  money,"  I  answer,  there  is 
no  such  thing  as  intrinsic  value  in  any  thing.  The  idea 
of  intrinsic  value  in  money  has  been  discarded  by  the 
best  writers  on  economics  for  two  hundred  years. 

Does  anybody  believe  the  so-called  Gold  Standard 
to  be  an  invariable  standard,  as  it  would  be  if  its  value 
were  intrinsic?  Is  it  the  same  standard  now  with  a 
production  of  $450,000,000  a  year  that  it  was  in  the 
seventies  with  a  production  of  $100,000,000?  If  its 
value  is  intrinsic  it  cannot  change  and  $1,000,000  would 
have  the  same  value  as  a  thousand  millions.  But 
everybody  who  knows  anything  about  the  laws  of 
money  knows  better. 

Value  is  intrinsic  in  nothing.  Nothing  can  con- 
tain within  itself  that  for  which  it  will  exchange. 

Everything  has  intrinsic  qualities.  Gold  has  color, 
specific  gravity  and  other  qualities  peculiar  to  itself. 
Radium,  that  element  which  for  the  quantity  now  in 
existence  is  the  most  valuable  of  all  substances,  con- 
tains the  intrinsic  property  of  radio  activity  in  a  mar- 
vellous degree,  but  its  value,  like  everything  else,  de- 
pends upon  the  quantity  to  be  had  as  compared  with 
demand  for  it.  If  it  should  eventually  become  as 
abundant  as  copper,  there  is  no  telling  to  what  its 
price  would  fall. 

You  ask  about  Fiat  Money.  The  value  of  fiat 
money  depends  on  the  same  general  law  as  stated 
above.  This  is,  on  the  quantity  as  compared  with  its 
use.  If  issued  in  excess  its  value  will  fall  proportion- 
ately; nor  does  the  fact  that  such  money  is  declared  to 


48  GOLD  SUPPLY  AND  PROSPERITY 

be  legal  tender,  always  give  it  general  acceptance.  Its 
acceptance  depends  largely  on  the  authority  and 
standing  of  the  country  declaring  it  legal  tender.  Un- 
restricted fiat  money  might  become  worthless  from  its 
very  abundance,  as  in  the  case  of  Confederate  money. 

As  to  the  kinds  of  commodities  that  count  in  mak- 
ing demand  for  money,  I  answer  all  kinds.  Every- 
thing that  is  or  can  be  bought  or  sold  stands  over 
against  money.  The  fact  that  goods  may  be  sold  on 
credit  does  not  change  the  great  law  that  determines 
prices ;  the  fact  that  credit  is  asked  before  final  pay- 
ment may  make  the  prices  of  such  articles  higher  or 
lower,  but  the  general  law  is  not  changed  thereby. 

As  to  the  rapidity  of  the  circulation  of  money  as 
a  factor  in  determining  prices,  I  answer: 

That  the  value  of  one  thing  or  one  commodity  in 
another  does  not  depend  on  the  rapidity  with  which 
swapping  is  done.  Price  levels  are  determined  by  the 
available  supply  of  money,  and  by  price  levels  I  mean, 
of  course,  the  relation  generally,  of  goods — commodi- 
ties, property  of  all  kinds — to  money.  The  quantity 
of  money  available  at  a  given  place  at  a  given  time 
may  and  doubtless  does,  locally,  affect  trade  and 
prices ;  but,  over  the  whole  country,  I  doubt  if  rapidity 
of  circulation  is  a  calculable  quantity  in  determining 
prices,  nor  does  it  affect  the  general  law  above  stated. 


Prices  Vary  With  Money  Supply 

Uy   i'K()b\   E.   W.   KLvMMIiRIiR 

npHE  following  is  a  brief  general  statement  of  my 
opinions  concerning  the  questions  you  ask.* 
The  price  of  a  commodity  is  its  value  in  terms  of 
the  value  of  the  money  unit.  Prices  vary  in  accord- 
ance with  the  law  of  demand  and  supply.  Anything 
which  affects  the  demand  or  supply  of  commodities 
or  the  demand  or  supply  of  money  affects  prices. 

By   money    I   mean    (modifying   Walker's   defini- 
tion) : 
|V  That    which    passes    freely    from    hand    to    hand 

J/  throughout  the  community,  in  final  discharge  of  debts 
J^      and    full    payment    for    commodities,    being    accepted 
/        equally  without  reference  to  the  character  or  credit  of 
r^         the  person  who  offers  it,  and  without  the  intention  of 
\    the  person  who  receives  it  to  consume  it  or  enjoy  it 
\  otherwise  than  in  tendering  it  to  others  in  discharge 
\of  debts  or  payment  for  commodities. 

This  definition  is  based  upon  the  most  important 
function  of  money,  the  function  from  which  all  others 
are  derived,  viz. :  that  of  serving  as  a  common  medium 

*  Professor  Kemmerer's  views  on  the  relation  existing  between 
money  and  prices  are  stated  in  detail  in  a  monograph  on  the  subject 
of  "  Money  and  Credit  Instruments  in  Their  Relation  to  General 
Prices." 

49 


50  GOLD  SUPPLY  AND  PROSPERITY 

of  exchange.  It  classifies  all  media  of  exchange  to- 
gether which  performs  that  function  in  the  same  way. 
It  has  the  additional  advantages  of  being  workable, 
and  of  conforming  to  popular  usage. 

The  money  supply  should  always  be  interpreted 
in  terms  of  its  rate  of  turn-over,  so  likewise  should 
the  commodity  supply.  The  price  relation  may  be 
expressed  in  the  following  formula,  in  which 

M  equals  the  total  number  of  money  units, 
R  equals  their  average  rate  of  circulation, 
N  equals  the  total  number  of  commodities  (in- 
cluding under  the  term  commodity  every- 
thing which  is  sold). 
E  equals  their  average  rate  of  exchange, 
P  equals  the  average  price  of  all  commodities 

exchanged, 
C  equals  the  total  amount  of  checks  used  in  the 

exchange  of  commodities. 
Re  equals  their  average  rate  of  circulation, 

MR_  I  -CRc 
P= 

NE 

Money  and  checks  not  exchanged  for  commodi- 
ties and  commodities  not  exchanged  for  money  or 
checks  have  zero  rates  of  turnover  and  accordingly 
cancel  out  in  the  formula. 

Assuming  a  given  state  of  credit  development, 
and  a  fixed  amount  of  business,  the  proportion  of  de- 
posit currency  (CRc)  to  bank  reserves  is  a  function  of 
business  confidence;  and,  business  confidence  remain- 
ing the  same,  an  increase  in  the  monetary  circulation 


PRICES  VARY  WITH  MONEY  SUPPLY  51 

is  accompanied  by  a  proportionate  increase  in  bank  re- 
serves and  in  the  deposit  currency  which  they  support; 
a  decrease  in  the  monetary  circulation  has  the  oppo- 

fsite  effect.  This  being  true,  the  old  quantity  theory  is 
still  valid,  in  spite  of  all  the  complexities  of  our  mod- 
ern industrial  regime,  and  general  prices,  other  things 
equal,  vary  proportionately  and  in  the  same  direction 

*  with  variations  in  the  money  supply. 

Under  a  system  of  free  and  gratuitous  coinage  the 
value  of  the  money_jiiiit  and  the  value  of  its  metallic 
content  cannot  appreciably  differ.  The  use  of  token 
coins,  of  paper  money  of  all  kinds,  and  of  checks  ef- 
fect an  economy  in  the  use  of  the  standard  money 
metal  and  thereby  influence  the  supply  of  standard 
money  and  affect  the  value  of  the  money  unit.  The 
direct  influence  of  such  media  of  exchange  upon  prices 
is  essentially  the  same  as  that  of  standard  money. 

The  questions  you  ask  are  too  complicated  and 
at  the  present  time  too  controversial  to  permit  a  satis- 
factory answer  in  a  few  hundred  words.  The  above 
statement  gives  somewhat  categorically  my  general 
views  on  the  subject. 


The  World's  Gold  Production 

I>y  A.  Selwvn-Brown 

T^EW  subjects  afford  a  more  interesting  study  than 
the  production  of  the  principal  commercial  metals 
which  are  so  intimately  involved  with  industrial  pros- 
perity. Of  all  the  metals  gold  claims  the  greatest  at- 
tention, by  reason  of  its  importance  as  the  universal 
standard  of  value.  The  far-reaching  effects  of  its  com- 
parative abundance  or  scarcity  have  long  been  favorite 
subjects  for  theoretical  discussions. 

Many  still  remember  the  sensations  caused  in 
Europe,  between  1890  and  1896,  by  the  pronounce- 
ments of  Dr.  Suess,  a  professor  of  geology  in  the  Uni- 
versity of  Berlin,  asserting,  on  supposed  geological 
grounds,  that  the  world's  gold  supplies  are  limited,  and 
that,  within  a  comparatively  short  period,  we  would 
have  to  submit  to  regularly  diminishing  annual  yields, 
which  would  result  in  industrial  and  financial  depres- 
sions and  panics  of  unparalleled  severity. 

Facts  have  not  to  date  verified  the  professor's 
prognostications.  In  recent  years  the  phenomenal 
yields  of  some  of  the  Australian,  American,  Alaskan 
and  South  African  gold  fields  have  caused  estimates  of 
the  gold  output  of  the  future  to  be  most  optimistic. 
Early  this  year,  the  director  of  the  United  States  mint 
estimated  that  during  the  next  20  years  the  world's 

53 


54 


GOLD  SUPPLY  AND  PROSPERITY 


gold  production  will  average  $400,000,000  per  annum. 
Consequently,  in  two  decades,  a  total  of  $8,000,000,000 
in  gold  will  be  added  to  the  world's  supply.  Allowing 
the  usual  25 7^^  for  gold  used  in  the  arts,  there  will  re- 
main $6,000,000,000  worth  for  monetary  purposes. 

The  world's  total  production  in  modern  times  has 
amounted  to  over  $10,000,000,000.  Figures  recently 
compiled  by  J.  P.  Hutchens  ('•')  indicate  that  the  gold 
production  of  those  countries  in  which  statistics  have 
been  kept  is  as  follows: 


WORLD'S  GOLD  PRODUCTION  IN  MODERN  TIMES 


The  United  States 1792-1905  . 

Australasia    1851-1905 . 

Russia    and    Siberia 1814-1905  . 

Colombia    1537-1905 , 

Brazil    1691-1905. 

Africa    1887-1905. 

Mexico    1521-1905. 

Canada     1858-1905. 

Bolivia    1545-1905. 

Peru     1533-1905. 

British  India  1884-1905  . 

Austro-Hungary    1493-1905 . 

Chile    1545-1905. 


$2,860, 

2,539, 

1,434. 

895, 

720, 

711, 

307, 

237, 

199 

119 

115 

70 

33 


854,000 
117,000 
679,000 
735,000 
902,000 
246,000 
161,000 
202,000 
611,000 
389,000 
,116,000 
,242,000 
,266,000 


Total  $10,244,520,000 

RUSSIA,  AUSTRALIA,  AND  UNITED  STATES 

The  above  table  is  worthy  of  study  and  will  be 
found  to  upset  our  previous  ideas  regarding  the  prin- 
cipal sources  of  our  gold  supply.  Although  Russia  has 
long  been  known  as  an  important  source  of  the  world's 
gold,  few  know  that  it  ranks  so  high  as  to  hold  the 


*  J,    p.    Hutchens,    "Total   Gold   Production."      The   Engineering   and 
Mining  Journal,   March  31,   1906. 


THE  WORLD'S  GOLD  PRODUCTION  55 

third  position  among  the  world's  producers.  The  posi- 
tion of  Austraha  is  also  very  remarkable.  Of  course, 
it  is  well  known  that  the  Australian  fields  today  are 
among  the  greatest  gold  yielders;  but  few  are  aware 
of  the  fact  that  since  1850,  when  gold  was  first  discov- 
ered in  Victoria,  the  Australian  gold  fields,  with  the  aid 
of  an  amount  of  capital  which  sinks  into  complete 
insignificance  when  compared  with  the  immense 
amount  invested  in  the  development  of  the  American 
gold  fields,  have  produced  almost  as  much  gold  as  the 
United  States.  In  other  words,  the  Australian  output, 
in  the  past  55  years,  has  almost  equalled  that  of  the 
United  States,  during  the  past  113  years.  It  must  be 
remembered,  however,  that  gold  mining  in  the  United 
States  was  really  not  vigorously  prosecuted  until  after 
the  California  discoveries,  in  1849.  Australia's  great 
showing  exhibits  the  immense  possibilities  it  possesses 
as  a  future  producer. 

COLOMBIA  AND  BRAZIL 

The  positions  of  Colombia  and  Brazil  are  also  in- 
teresting. Today  the  output  of  each  country  is  only 
about  $2,000,000  per  annum;  but  during  the  early  days 
of  Spanish  rule  their  rich  placer  fields  were  vigorously 
worked  with  most  profitable  results.  Their  great  yields 
were  made  over  a  century  ago.  In  the  future,  when 
transportation  facilities  improve,  both  countries  will 
again  become  prominent  gold  producing  centers,  as  it 
is  a  well-established  fact  that  both  flanks  of  the  Andes 
and  its  subsidiary  ranges  contain  large  areas  of  country 
carrying  gold-bearing  veins. 


56  GOLD  SUPPLY  AND  PROSPERITY 

RECORD  OUTPUT  OF  1905 

The  world's  gold  production  in  1905  amounted  to 
$379,635,413,  and  showed  an  increase  of  nearly  $30,- 
550,000  or  8%  above  the  output  in  1904.  This  in- 
crease was  due  chiefly  to  the  large  yields  in  the  Trans- 
vaal, where  special  efforts  are  being  made  to  make  a 
good  showing  with  coolie  labor,  and  in  the  United 
States,  where  production  was  stimulated  by  the  activ- 
ity in  the  rich  fields  in  Nevada  and  Alaska,  and  the 
large  values  obtained  from  the  copper,  lead  and  zinc 
smelters,  in  which  gold  is  saved  as  a  by-product.  The 
total  yield  in  1905  was  more  than  5^/^  times  larger  than 
the  yield  in  1850,  and  nearly  four  times  as  great  as  that 
in  1885.  The  world's  production,  arranged  according 
to  continents,  is  as  follows,  the  Russian  output  being 
included  under  Europe : 

WORLD'S  GOLD  PRODUCTION  1903-5 

1903.  1904.  1905. 

North  America $105,105,409  $111,192,642  $118,176,774 

Australasia 89,206,739  87,241,662  85,970,779 

Africa 68,036,433  86,249,936  113,226,971 

Europe 29,132,342  29,808,900  27,668,111 

Asia 25,134,755  24,839,368  24,446,336 

South  America  11,348,805  9,255,745  10,069,942 

Other  Countries 1,500,000  1,500,000  76,500 


Totals    $329,465,483     $350,088,253     $379,635,413 

GOLD  MINING  IN  UNITED  STATES 

The  United  States  output  was  greater  in  1905  than 
in  any  former  year.  All  the  western  mining  fields  were 
actively  worked  with  gratifying  results.  Colorado,  as 
usual,  was  the  banner  producer.     The  mines  in  Colo- 


THE  WORLD'S  GOLD  PRODUCTION  57 

rado  in  1905  produced  1,237,443  oz.  of  gold,  valued  at 
$25,577,045,  an  increase  in  value  of  $1,181,245  over  the 
production  in  1904.  The  Californian  output  ranked 
second,  and  was  valued  at  $19,168,045.  In  recent  years, 
California  has  greatly  benefited  by  improvements  in 
hydraulicking  methods  of  gold  winning  and  by  the 
introduction  of  gold  dredges  to  re-work  the  old  river 
placers.  The  establishment  of  several  large,  modern 
smelting  works,  which  have  lowered  the  treatment 
charges,  and  thus  enabled  owners  of  low  grade  ore 
mines  to  resume  operations  with  satisfactory  results, 
has  also  tended  towards  increased  yields.  In  the  north- 
western districts,  which  include  Shasta,  Trinity  and 
Siskiyou  counties,  which  were  formerly  gravel  mining 
fields,  quartz  mining  industries  are  rapidly  increasing. 
Another  factor,  which  has  had  an  important  bearing 
on  the  recent  improvement  in  Californian  mining  con- 
ditions, has  been  the  development  of  the  rich  gold  fields 
along  the  southern  border  of  Nevada.  The  old  gold 
mining  centers  over  the  line  in  California  attracted 
the  attention  of  prospectors  and  adventurers  who  re- 
opened old  mines  with  important  results.  Today  a 
number  of  valuable  properties,  covering  a  large  area 
of  ground  in  the  mountainous  and  desert  regions  in 
Inyo  county,  are  being  opened  up,  and  their  prospects 
are  such  as  to  assure  an  appreciable  increase  in  the 
California  gold  yield  for  some  years. 

Alaska's  output  of  708,700  oz.  was  valued  at  $14,- 
650,100;  an  increase  of  $5,345,900  as  compared  with 
1904.  The  gold  mining  industries  of  Alaska  are  mak- 
ing rapid  progress.  Capital  is  flowing  into  the  gold 
fields,  new  railroads  are  improving  transportation,  and 


58 


GOLD  SUPPLY  AND  PROSPERITY 


the  erection  of  numerous  new  mills  and  smelters  will 
provide  such  excellent  facilities  as  to  enable  miners,  in 
the  next  few  years,  to  more  than  double  their  present 
annual  yields.  It  is  estimated  that  the  gold  output  of 
Alaska  in  1906  will  exceed  $20,000,000,  and  that  of  the 
Dawson  and  Yukon  will  approach  $8,000,000. 

Nevada,   which   formerly  ranked  high   as   a   gold 
producing  state,  is  rapidly  coming  to  the  front  again. 


GOLD  DREDGE  IN  GUIANA' 

During  the  past  four  years  a  large  number  of  new 
camps  have  been  discovered  in  Nye  and  Esmeralda 
counties,  in  the  southwestern  part  of  the  State,  which 
are  developing  well.  In  the  Tonopah,  Goldfield  and 
Bullfrog  districts  many  valuable  mines  have  been  de- 


For  the  four  cuts  showing  gold-producing  methods  in  South 
America  acknowledgment  is  made  to  the  courtesy  of  the  Engineering  and 
Mining   Journal,    of   New    York. 


THE  WORLD'S  GOLD  PRODUCTION  59 

veloped,  and  within  the  next  two  or  three  years,  when 
milling  and  smelting  facilities  are  provided,  they  will 
yield  large  returns,  and  will  most  probably  enable 
Nevada  to  take  rank  as  the  greatest  gold  producer  in 
America.  Nevada  produced  227,363  oz.  of  gold,  valued 
at  $4,700,000,  in  1905,  and  this  year  the  yield  will  be 
considerably  higher.  In  the  past  few  weeks  some  of 
the  leasees  of  claims  at  Goldfield  have  been  daily  rais- 
ing ore  valued  as  high  as  $50,000. 

CANADA  AND  MEXICO 

Gold  mining  industries  are  developing  rapidly  in 
many  foregin  countries.  In  Canada,  British  Colum- 
bia and  the  Yukon  are  important  gold  producers. 
Many  of  the  northwestern  rivers  like  the  Saskatche- 
wan, Yukon,  Qussnal  and  Frazier  possess  large  areas 
of  auriferous  sand  and  gravel  beds  awaiting  the  devel- 
opment of  the  gold  dredging  industry.  They  will, 
doubtless,  become  producers  within  the  next  few  years. 
The  progress  of  Mexico  as  a  gold  producer  is 
astonishing.  In  1905  the  output  amounted  to  702,799 
oz.,  valued  at  $14,526,855,  as  compared  with  $12,819,- 
720,  in  1904,  and  $10,659,641,  in  1903.  The  country  is 
rapidly  being  developed  by  British  and  American  capi- 
talists who  are  building  extensive  railroad  systems, 
and  developing  many  new  mining  fields.  As  a  conse- 
quence, we  may  expect  a  steady  increase  each  year  in 
the  Mexican  gold  output. 

SOUTH  AMERICA 

South   America   is  still   an   important   contributor 
to  the  world's  supply;  the  total  annual  output  being 


60 


GOLD  SUPPLY  AND  PROSPERITY 


about  $11,000,000.  The  chief  producing  centers  today 
are  Brazil,  Chili  and  the  three  Guianas.  The  mining 
possibilities  of  South  America  are  very  great  and  there 
is  little  doubt  that  improved  transportation  facilities 


DRILLING  FOR  W^ATER,  SOUTH  AMERICAN  GOLD  FIELDS 

and  the  investment  of  capital  in  gold  mining  could,  in 
a  few  years,  place  that  country  at  the  head  of  the  gold 
producers. 

RUSSIA 

Russia  also  has  good  possibilities  as  a  gold  mining 
country.  The  annual  production  is  now  about  $22,- 
000,000,  but  Siberia,  the  Urals  and  the  mountainous 
country  in  the  southeast  districts  in  Asiatic  Russia 
possess  important  auriferous  areas  only  requiring  the 
investment  of  capital  to  develop  them  into  large  gold 
fields. 


THE  WORLD'S  GOLD  PRODUCTION 


61 


Asia  has  never  been  very  remarkable  for  its  gold 
fields,  notwithstanding  that  the  metal  occurs  over  a 
large  part  of  the  continent  and  has  been  mined  since 
the  remotest  times.     The  total  annual  yield  is  about 


^ 


Ht 


SLUICING  GOLD.  SOUTH  AMERICA 

$24,000,000,   to  which  British   India   contributes   $12,- 
000,000  and  China  and  Japan  about  $4,500,000  each. 


The  principal  gold  mining  districts  in  Africa  are  in 
the  Transvaal,  although  British  capitalists  are  develop- 
ing valuable  gold  mines  in  Rhodesia,  the  Gold  Coast 
and  Egypt  which,  in  early  times,  was  an  important  gold 
mining  country.     The  Transvaal   gold  mining  Indus- 


62  GOLD  SUPPLY  AND  PROSPERITY 

tries  are  passing  through  a  crisis  at  present  which  was 
brought  on  by  the  mineowners  introducing  indentured 
Chinese  labor  with  the  view  of  defeating  the  poHtical 
ambitions  of  the  white  workers  resident  in  the  colony 
who  are  shortly  to  be  given  self  government  by  Eng- 
land. Great  efforts  have  been  made  to  increase  the 
gold  yield  by  artificial  means,  but  the  value  of  South 
African  mining  shares  has  depreciated  enormously, 
and  they  are  today  sold  only  with  difficulty.  No  new 
mines  are  being  developed  by  fresh  capital,  and  it 
would  be  utterly  impossible  to  float  a  new  Transvaal 
gold  mining  company  in  England.  This  condition  of 
affairs  will  continue  until  coolie  labor  is  abolished  and 
white  labor  takes  its  place.  This  change  must  inevit- 
ably be  made,  but  the  opposition  of  the  mineowners  is 
so  keen  that  they  will  continue  to  avoid  it  until  they 
have  tried  every  possible  expedient  to  evade  it.  This 
will  prove  very  harmful  to  the  colonies  industries,  and 
the  gold  production  will  not  be  materially  increased 
for  many  years.  The  yield,  during  the  statistical  year 
ending  June  30,  1906,  was  5,202,944  oz.  valued  at  $90,- 
170,889,  as  compared  with  4,322,577  oz.  valued  at  $88,- 
133,491  in  1905. 

AUSTRALASIA 

The  gold-bearing  areas  of  Australasia  are  beyond 
comparison  greater  than  in  any  other  country  and, 
since  the  discovery  of  the  Victorian  placer  fields  in 
1850,  Australasia  has  been  foremost  among  the  world's 
gold  producers. 

In  1905,  Australasia  was  the  third  largest  gold 
producer,  coming  close  to  the  United  States,  which  took 


THE  WORLD'S  GOLD  PRODUCTION 


63 


second  rank  after  Africa.  The  Australasian  yield  was 
valued  at  $85,970,779.  For  the  half  year  ending  June, 
1906,  the  yield  was  1,923,679  oz.  valued  at  $39,763,445, 
as  compared  with  1,944,551  oz.  valued  at  $40,196,869 
in  the  corresponding  period  in  1905.  The  total  yield 
this  year  promises  to  show  a  decrease  over  that  of  last 
year.     This,  however,  is  not  due  to  the  exhaustion  of 


TRANSPORTATION    METHODS   ON   SHALLOW    STREAMS,   SOUTH 
AMERICAN     GOLD    MINING     DISTRICTS 


the  mines,  but  to  well-known  geological  phenomena 
associated  with  the  secondary  enrichment  of  the  gold 
veins  above  the  water  level,  and  the  reduction  in  value 
of  the  ore  below  the  water  level. 

Australasia  is  a  remote,  sparsely  populated  coun- 
try, where  it  is  difficult  to  finance  new  mining  opera- 


64 


GOLD  SUPPLY  AND  PROSPERITY 


tions.  Mining  expansion  there  is  dependent  upon  the 
caprices  of  the  investment  markets,  which  are  largely 
swayed  by  the  conditions  of  the  pastoral  industries. 
During  the  past  few  years  the  pastoral  industries  have 
been  exceedingly  prosperous,  and  local  capitalists  have 
chiefly  devoted  their  attention  to  the  further  advance- 


A  SIBERIAN  MINE 

This  shows  well  the  nature  of  the  country  about  the  mines  in  the  Government 

of  Tomsk,  Siberia.      The  workmen's   and   employee's   quarters   of  the 

Bogum  Darovanni   mine  are  in   the  foreground.     The  first  stamp 

mill  of  this  mine  was  located  at  this  point  but  was  burned 

and  is   located   about   three   miles   down   the  gulch  of 

the     Federoski,     shown     in     the    above     view. 


ment  of  these  industries,  and  the  establishment  of 
numerous  branches  of  manufacturing.  Mining  invest- 
ments have  been  neglected,  and  few  new  mines  have 
been  developed.  As  a  consequence  the  gold  production 
is  dependent  on  the  old  mines.  In  accordance  with  the 
geological  laws  above  alluded  to  the  yields  of  the  estab- 
lished mines  gradually  diminish  with  depth,  and  this 


THE  WORLD'S  GOLD  PRODUCTION 


65 


diminution  is  reflected  in  the  total  annual  gold  yield 
of  the  commonwealth  and  New  Zealand. 

In  West  Australia  the  mines  are  being  operated 
at  depths  varying  between  1,500  and  2,000  feet.  Many 
of  the  mines  were  fabulously  rich  at  the  surface  but 


MODERN   SIBERIAN  GOLD   MINE 

This  shows  the  Chilian  mill  and  amalgamating  tables  of  the  Central 

mine,    Mrs.    O.    E     Iranitzka,    owner,    in    the    Marinsk 

District,    Government    of    Tomsk, 

below  the  water  level  settled  down  to  steady  producers 
of  ore  running  from  $15  to  $50  per  ton. 

In  Victoria  some  of  the  gold  mines  are  worked  at 
a  depth  of  more  than  3,000  feet ;  the  deepest  vertical 
gold  working  yet  reached. 

It  will  be  seen,  from  the  above  statements,  that 
to  keep  up  the  gold  supply  of  any  country  it  is  neces- 
sary to  annually  develop  new  mines  to  balance  the  in- 
evitable decrease  in  existing  producers.  While  in  Aus- 
tralia the  wool  and  other  pastoral  industries  are  enjoy- 
ing a  period  of  great  prosperity,  it  is  useless  to  expect 


66  GOLD  SUPPLY  AND  PROSPERITY 

any  large  investment  of  new  capital  in  new  mining 
operations  and,  for  this  reason,  we  may  expect  a  slight 
decline  in  Australian  gold  production  for  the  next  few 
years.  Whenever  a  drought,  or  other  active  cause, 
checks  the  prosperity  of  the  pastoral  industries  mining 
investments  will  again  attract  capital,  and  Australia 
will  then  advance  its  gold  production. 

To  a  considerable  extent,  the  reduction  in  the 
value  of  the  ore  is  balanced  by  reductions  in  mining 
and  metallurgical  charges  by  means  of  improved  pro- 
cesses. So  that  in  mines  where  such  a  balance  is  ob- 
tained the  operations  remain  profitable.  Mining  costs 
in  Kalgoorlie,  the  principal  gold  field  in  West  Aus- 
tralia, now  average  less  than  $4  per  ton,  as  compared 
with  $20  when  the  rich  surface  zone  was  being  mined. 
Some  of  the  large  mines  working  on  the  Bendigo  field, 
in  Victoria,  between  2,000  and  3,000  feet  in  depth,  are 
regularly  paying  monthly  dividends  by  mining  and 
crushing  ore  assaying  less  than  $2  per  ton. 

WORLD'S  SUPPLY  OF  GOLD  INEXHAUSTIBLE 

Many  economists  who  essay  to  forecast  the  gold 
production  of  the  future  keep  in  view  the  rich,  easily- 
worked  placer  fields  and  rich  bonanza  vein  mining  dis- 
tricts, and  their  conclusions  are  pessimistic  or  optimis- 
tic in  almost  exact  ratio  with  the  psychological  temper- 
ament of  the  mining  share  markets  with  respect  to 
gold  mining  investments  at  the  time  the  forecasts  are 
framed.  They  neglect  to  take  into  consideration  the 
singular  periodical  fluctuations  in  the  amount  of  gold 
mining  investments  and  the  intimate  bearing  of  those 
fluctuations  upon  the  annual  gold  yield. 


THE  WORLD'S  GOLD  PRODUCTION 


67 


The  world's  gold  supply  is  absolutely  inexhausti- 
ble, no  matter  what  demands  are  made  upon  it.  Hith- 
erto the  attention  of  miners  has  been  entirely  directed 
to  comparatively  rich,  easily-worked  deposits.  But  it 
has  to  be  remembered  that  gold  in  small  quantities  oc- 
curs in  enormous  masses  of  rock  throughout  the  world. 
Almost  all  volcanic  rocks  and  the  formations  derived 


BEGININGS  OF  A  GOLD  MINE 

Prospectors  have  located  a  claim  and  have  erected 
the  mining  monuments  shown  in  the  center  of  the 
photograph.       The   view   is    from    Bullfrog,   Nevada 

from  them,  such  as  granite,  serpentine  and  rhyolite, 
contain  appreciable  quantities  of  gold,  and  vast  depos- 
its of  sedimentary  rocks  derived  from  such  volcanic 
formations  contain  gold  in  concentrated  form,  and  are 
today  in  some  localities  profitably  worked.  Profit  is 
and  always^as  been  the  incentive  to  gold  production. 
Should  there  ever  be  need  for  working  the  volcanic 
and  sedimentary  rocks  that  are  auriferous  the  means  of 
profitably  working  them  will  be  found. 


68  GOLD  SUPPLY  AND  PROSPERITY 

GOLD  FROM  SEA  AND  HEAVENS 

Experiments  have  shown  that  gold  is  regularly 
falling  to  the  earth,  in  association  with  cosmic  dust, 
and  day  and  night  settles  all  over  the  land  and  sea. 
Some  of  this  gold,  when  concentrated  by  wind  and 
water,  or  dissolved  by  acid  surface  waters  and  rede- 
posited,  in  a  more  concentrated  form,  is  recoverable. 

The  waters  of  the  sea,  also,  are  auriferous,  and 
there  can  be  little  doubt  that,  if  ever  in  the  remote 
future  there  should  be  extraordinary  demand  for  gold, 
means  could  be  found  for  profitably  reducing  the  gold 
in  the  seawater. 

The  area  of  the  sea-bed  is  much  larger  than  that 
of  the  land.  Its  composition  is  similar  in  every  respect 
with  that  of  the  land.  It  is  composed  of  mountains, 
plains  and  plateaus ;  of  igneous,  metamorphic  and  sedi- 
mentary rocks  which  contain  great  areas  of  gold-bear- 
ing and  other  mineral  veins.  Only  in  a  few  instances, 
however,  where  the  submarine  gold  fields  are  close  to 
the  land  will  it  be  possible  to  work  them,  as  the  sub- 
marine coal  fields  are  now  worked.  But  those  oceanic 
gold  fields  on  which  the  veins  outcrop  at  the  surface 
are  subject  to  constant  attrition  by  the  waves.  This 
causes  the  shedding  of  gold,  which  is  concentrated  by 
the  sea  and  washed  ashore.  Gold  deposits  thus  formed 
exist  in  many  countries,  and  they  are  remarkable  in 
that  they  are  renewed  or  enriched  by  almost  every 
storm  that  passes  over  them.  These  deposits  are 
known  by  various  names,  but  the  term  auriferous  beach 
sand  sufficiently  describes  them.  They  occur  in  the 
Pacific  beaches,  from  Alaska  to  Terra  del  Fuego,  and 


THE  WORLD'S  GOLD  PRODUCTION  69 

throughout  the  coasts  of  Australia  and  New  Zealand, 
where  they  have  long  been  worked  with  profitable  re- 
sults. The  gold  output  from  the  gold-bearing  beaches  at 
Nome,  Alaska,  this  year  is  expected  to  reach  $4,000,000. 
The  coast  between  Cape  Nome  and  Point  Rodney,  for 
a  distance  of  more  than  20  miles,  is  being  worked  for 
gold  by  hundreds  of  men.  The  beach  is,  in  places, 
auriferous  for  a  width  2,000  feet  inland  from  the  tide 
level,  and  to  a  depth  up  to  50  feet.  From  the  western 
base  of  Cape  Nome  there  is  a  series  of  gravelly  sea- 
beaches  extending  inland  several  miles,  which  contain 
gold  and  are,  in  places,  being  worked  today.  These 
marine  deposits  yielded  gold  to  the  value  of  $2,200,000 
in  1903,  $2,185,000  in  1904,  and  $2,850,000  in  1905. 

GOLD  IN  SANDS  AND  CLAYS 

Over  large  areas  of  the  earth's  surface  there  are 
immense  deposits  of  auriferous  sands  and  clays.  These 
are  chiefly  in  arid  regions.  In  many  countries  they  are 
profitably  worked  by  dry-blowing  processes.  But  ex- 
periments in  Australia  have  shown  that  much  of  the 
gold  can  be  extracted  from  them  by  a  special  adapta- 
tion of  gold  dredging  known  as  the  paddocking  pro- 
cess. These  deposits  are  formed  by  the  erosion  of 
auriferous  rock  formations,  and  the  concentration  of 
the  gold  by  the  action  of  wind  and  rain,  just  as  the 
gold  in  river  sands  is  formed  by  aqueous  erosion  and 
concentration. 

GOLD  DREDGES 

The  operating  of  gold-saving  dredges  on  rivers 
has,  in  recent  years,  been  an  important  factor  in  in- 
creasing the  world's  annual  gold  output.    Gold  dredges 


70 


GOLD  SUPPLY  AND  PROSPERITY 


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THE  WORLD'S  GOLD  PRODUCTION  71 

are  chiefly  of  two  types — bucket  and  pump  dredges. 
A  bucket  dredge  consists  of  a  barge  fitted  at  the  bow 
with  a  digging  apparatus  consisting  of  an  endless  chain 
of  buckets  of  great  weight  and  capacity  that  will  cut 
and  dig,  not  only  the  auriferous  gravel,  but  also  the 
bed  rock  in  which  some  of  the  gold  may  be  intrenched ; 
a  revolving  or  shaking  screen,  located  amidships,  which 
sizes  and  washes  the  dredged  material ;  gold  saving 
devices ;  an  elevator  and  stacker  at  the  stern  for  dis- 
charging the  waste;  pumps  for  supplying  water  for 
washing  the  gravel  and  concentrating  the  gold  from  it, 
and  winches  for  working  the  dredge  by  means  of  ropes 
and  keeping  the  dredge  in  the  position  most  suitable  for 
working.  Power  is  supplied  by  steam,  electricity  or 
hydraulic  pressure.  Some  of  the  largest  machines, 
which  resemble  in  general  appearance  the  bucket 
dredges  employed  in  harbor  works,  have  a  capacity  of 
200,000  cubic  yards  of  sand  per  month,  when  operating 
in  alluvial  soil.  They  are  operated  at  a  cost  varying 
from  2Y2  to  15  cents  per  cubic  yard,  depending  upon  the 
local  costs  of  labor  and  supplies  and  nature  of  ground 
worked.  A  modern  gold  dredge  costs  up  to  $50,000 
and  requires  a  crew  of  4  to  6  men  to  operate  it. 

The  pump  dredge  resembles  the  centrifugal 
dredges  used  in  deepening  harbors,  and  although  not 
used  very  largely  in  gold-winning  in  America,  is  very 
successfully  applied  in  such  work  in  many  places  in 
Australia. 

The  application  of  gold  dredging  is  already  exten- 
sive; but  it  still  has  many  possibilities.  It  is  a  New 
Zealand  invention,  and  was  at  first  applied  to  deep. 


72  GOLD  SUPPLY  AND  PROSPERITY 

sandy  river  beds.  It  was  afterwards  extended  to  opera- 
tions on  the  ocean  bed  adjacent  to  the  coast,  and  to 
auriferous  coast  beaches.  In  Australia  it  was  adapted 
to  the  working  of  flats  adjacent  to  rivers,  benches  or 
terraces  back  from  the  coast,  and  paradoxical  though  it 
at  first  appears,  to  inland  arid  sand  plains. 

PADDOCK  DREDGING 

The  dredging  of  arid  regions  for  gold  is  carried 
out  by  digging  a  paddock,  usually  about  half  acre  in 
extent,  in  which  a  dredge  is  built.  Water  is  pumped 
into  the  paddock  from  artesian  wells,  or  other  sources, 
to  float  the  dredge.  As  the  dredge  works  away  the 
ground  to  the  required  depth  and  width,  it  fills  in  be- 
hind with  the  waste  removed  from  the  front  with  little 
loss  of  water.  In  some  recent  Australian  plants  the 
dredge  is  not  floated  at  all.  It  is  simply  placed  in  posi- 
tion and  moved  about  by  mechanical  means.  Water  is 
required  only  for  filling  a  small  pit  in  which  the  bucket 
diggers  work,  for  washing  the  dredged  material,  and 
for  concentrating  the  gold  in  the  sluices.  The  water 
is  saved  and  used  over  again. 

As  an  instance  of  the  profitableness  of  gold  dredg- 
ing in  suitable  localities,  it  may  be  stated  that  the  Elec- 
tric Dredging  Company's  No.  1  dredge,  working  on  a 
New  Zealand  river,  obtained  1,273  oz.  of  gold,  valued 
at  $26,313,  in  five  days'  actual  dredging,  and  this  record 
has  been  approached  by  many  other  machines. 

IMPROVED  METHODS 

Improvements  in  mining  methods  and  metallur- 
gical processes  are  continually  being  made  with  most 


THE  WORLD'S  GOLD  PRODUCTION  73 

beneficial  results  in  regard  to  the  reduction  in  the  cost 
of  gold  production.  At  present,  attention  is  directed 
mainly  to  methods  of  ore  extraction  without  the  use  of 
timber  for  supporting  the  sides  and  roof  of  the  exca- 
vated ground.  In  many  mining  localities  large  quan- 
tities of  timber  were  required  for  such  work.  Recent 
improvements  in  mining  have  enabled  many  mines  to 
almost  do  away  with  timber  for  underground  supports, 
as  the  waste  is  filled  into  the  portion  from  which  the 
ore  is  removed.  When  the  mining  operations  do  not 
supply  sufficient  waste  rock  for  the  purpose  of  filling 
the  excavated  ground,  waste  is  sent  down  from  the 
surface. 

In  mines  working  wide  ore  bodies,  the  ore  is  very 
cheaply  mined  by  means  of  steam  shovels  working 
downward  from  the  surface.  This  system  has  been 
pursued  for  many  years  in  the  Alaska-Treadwell  mine, 
Alaska,  and  has  recently  been  most  successfully 
adopted  in  the  famous  Mount  Morgan  mine,  Queens- 
land. 

The  most  noticeable  features  in  recent  methods  of 
gold  ore  treatment  have  been  fine  crushing  in  tube  or 
ball  mills,  and  the  leaching  of  the  gold  from  the  slime 
by  the  cyanide  process.  Much  attention  has  also  been 
given  to  improvements  in  pyretic  smelting  processes 
which  have  greatly  reduced  the  cost  of  treating  sul- 
phide ore. 

Wonderful  improvements  have  also  been  intro- 
duced into  metallurgical  processes  from  which  gold  is 
obtained  as  a  by-product.  The  most  prominent  of 
these  are  the  new  processes  of  treating  the  auriferous 


74  GOLD  SUPPLY  AND  PROSPERITY 

zinc  ores  of  the  Broken  Hill  field,  by  magnetic,  and  oil 
and  gas  concentration. 

A  GOLD  FAMINE  IMPOSSIBLE 

The  principal  points  the  writer  desired  to  empha- 
size were  that  the  known  gold  deposits  of  the  world 
are  ample  to  supply  all  the  demands  likely  to  be  made 
upon  them.  There  will  never  be  any  likelihood  of  gold 
famines  occurring  from  "lack  of  gold  deposits.  As  the 
rich  surface  deposits  are  being  worked  out,  improve- 
ments in  mining  and  metallurgical  processes  are  enab- 
ling poorer  and  poorer  deposits  to  be  worked.  The 
annual  output  of  the  world  will  continue  steadily  to 
increase;  but  fluctuations  in  the  yields  of  particular 
countries,  or  mining  districts,  will  vary,  as  heretofore, 
in  sympathy  with  the  temper,  or  psychological  envi- 
ronment, of  the  mining  markets  in  respect  to  gold  min- 
ing investments,  and  the  demand  for  gold. 

An  exact  estimate  of  the  annual  production  cannot 
be  formed  owing  to  the  uncertainty  of  several  import- 
ant factors.  The  estimate  of  the  director  of  the  mints', 
referred  to  above,  is  undoubtedly  too  low.  Within  the 
next  year  or  two  the  annual  output  will  almost  cer- 
tainly exceed  $400,000,000;  thereafter  a  progressive 
increase  each  year  may  confidently  be  expected. 


The  Increasing  Supply  of  Gold 

Its  Effect  Upon  (a)  Prices,  (b)  Wages,  (c)  Rents,  (d) 
Interest,  (e)  Industry,  (f)  Securities,  (g)  Busi- 
ness Ethics,  (h)  Politics  (i)  Society 

The  first  thirteen  articles  on  this  subject  were 
published  as  part  of  a  symposium  in  the  first  (Decem- 
ber, 1905),  number  of  Moody's  Magazine.  They  are 
republished  here  without  change.  The  following 
tables  and  memoranda  as  to  gold,  prices,  wages  and 
interest  rates  are  also  republished  from  the  introduc- 
tion to  the  symposium.  They  have,  however,  been 
revised  to  bring  them  to  date. 

MEMORANDA.  AS  TO  GOLD,  PRICES,  WAGES 
AND  INTEREST 

The  following  tables  of  statistics  of  prices,  wages, 
interest  rates  and  gold  are  given  mainly  for  purposes 
of  comparison.  All  such  statistics  are  necessarily  in- 
accurate and  unreliable.  No  two  authorities  agree. 
Frequently  they  differ  radically. 

75 


76 


GOLD  SUPPLY  AND  PROSPERITY 


Statistics  o!  Gold,  Money,  Interest  Rates, 


Interest 

Prices 

World's 
Annual  Output 

World  s  Visible 

Per 
Capita 
Circula- 

Rates on 
60-day 

(Wholesale) 

-2 

By  Index 

of  Gold* 
Coinage 

.Supply   of  Goldt 

tion  of 

Mouev  in 

U.  S. 

2-name 
paper! 

Yearly 
Average 

Numbers 
Aldrich   Report 

<j 

Coinage 

%  In- 

Gold 

Cur 

rencj' 

Value 

Value  Dec.  31 

crease 

June  30 

in  New 
York 

Jan.  1 

Jan.  1 

1850 

S  44,500,000 

11,606,400,000 

12.02 

7.2 

89.2 

89.2 

1851 

67,600,000 

1,669,440,000 

3.9 

13.76 

8.3 

98.6 

98.6 

1852 

132.800,000 

1,732,360,000 

3.7 

14.56 

7.3 

97.9 

97.9 

1853 

155.500,000 

1.795,160,000 

3.6 

15.70 

10.1 

105.0 

105.0 

1854 

127.500,000 

1.857,850,000 

3.5 

16.10 

12.5 

105.0 

105.0 

1855 

135,100,000 

1,920,390,000 

3.4 

15.34 

9.3 

109.2 

109.2 

1856 

134,000,000 

1,983,600,000 

3.3 

15.16 

9.9 

112.3 

112.3 

1857 

134,000.000 

2.046,680,000 

i.2 

15.81 

10.4 

114.0 

114.0 

1858 

133,000,000 

2,109,640,000 

3.0 

13.74 

6.7 

113.2 

113.2 

1859 

130.000,000 

2,172,470,000 

2.9 

14.35 

7.2 

102.9 

102.9 

1860 

127,000,000 

2  235,480.000 

2.9 

13.85 

7.7 

100.0 

100.0 

1861 

122,000,000 

2.292,210,000 

2.4 

13.98 

6.6 

94.1 

94.1 

1862 

119.000,000 

2,.349, 130,000 

2.4 

10.23 

.     5.4 

101.6 

104.1 

1863 

119,000,000 

2,405,940,000 

2.4 

17.84 

5.8 

91.1 

132.2 

1864 

122.000,000 

2,462,630,000 

2.3 

19.67 

8.0 

110.7 

172.1 

1865 

126,000.000 

2,519,220,000 

2.3 

20.57 

8.2 

107.4 

232.2 

1866 

127.000,000 

2,589,010,000 

2.3 

18.99 

6.8 

134.0 

187.7 

1867 

127,000,000 

2,638,660,000 

2.2^ 

18.28 

7.2 

132.2 

165.8 

1868 

126,000,000 

2.698,200,000 

2.2 

18.39 

7.3 

125.6 

173.9 

1869 

125,000.000 

2,768,410,000 

2.6 

17.60 

9.1 

112.3 

152.3 

1870 

123,000,000 

2,827,690,000 

2.1 

17.50 

7.2 

119.0 

144.4 

1871 

119,000,000 

2,879,830,000 

1.8 

IS.IO 

6.1 

122.9 

136.1 

1872 

113,000,000 

2.931,970,000 

1.8 

18.19 

8.0 

121.4 

132.4 

1873 

112.000,000 

2.974,220,000 

1.4 

18.04 

10.3 

114.5 

129.0 

1874 

90.750.000 

3,013,660,000 

1.6 

18.13 

6.0 

116.6 

129.9 

1875 

97,500,000 

3,056,400,000 

1.4 

17.16 

5.5 

114.6 

128.9 

1876 

103,700.000 

3,102,150.000 

1.5 

16.12 

$.2 

108.7 

122.6 

1877 

113,947,200 

3,152,933,000 

1.6 

15.58 

5.2 

107.0 

113.6 

1878 

119,092,800 

3,206,180,000 

1.6 

15.32 

4.8 

103.2 

104.6 

1879 

108,778,800 

3.254,170,000 

1.5 

16.75 

5.0 

95.0 

95.0 

1880 

106,436,800 

3,300,890,000 

1.4 

19.41 

5.2 

104.9 

104.9 

1881 

103,023,100 

3,345,820,000 

1.3 

21.71 

5.2 

108.4 

108.4 

1882 

101,996,600 

3,400,140,000 

1.6 

22.37 

5.7 

109.1 

109.1 

1883 

95,392,000 

3,441,050,000 

1.2 

22.91 

5.5 

106.6 

106.6 

1884 

101,729,600 

3,485,040,000 

1.2 

22.65 

5.2 

102.6 

102.6 

♦Figures  for  1850  to  1854  from  U.  S.  Mint  Report  for  1880 ;  1855  to  1873  from 
the  "Mineral  Industry,"  by  Charles  P.  Rothwell;  since  1873  by  Director  of  Mint. 

tEstimates  of  Moody's  Magazine  previous  to  1892;  and  for  1905  and  1906; 
1892  to  1904  by  Director  of  Mint. 

tFrom  "Appreciation  and  Interest,"  by  Prof.  Irving  Fisher,  for  1«Q5  and 
pre\'ioiis  years;  since  then  compiled  from  Financial  Chronicle. 


THE  INCREASING  SUPPLY  OF   GOLD 


77 


Prices,  Wages  and  Relative  Value  of  Gold. 


Prices 
(Wholesale) 

By  Index 

Numbers 


I^abor 
Burea<: 


Av.  for 
Year 


Duii's§ 


Jan.  1 


Wages 

By 

Jndex  Numbers 
Aldrich    Report 
^  Cur- 

rency 


Gold 


I,abor 
Bureau 


Jan.  1     Jan.  1 


Av.    for 
Year 


Appreciation  or 

Depreciation  of  Goldll 

as  tested  by 


Prices  '  Wajjes 


Prices 

and 
Wages 


90.9 

90.9 

91.1 

91.1 

91 .8 

91.8 

93.2 

93.2 

95.8 

95.8 

97.5 

97.5 

98.0 

98.0 

99.2 

99.2 

97.9 

97.9 

99.7 

99.7 

100.0 

100.0 

100.7 

100.7 

101.2 

103.7 

81.9 

118.8 

86.2 

134.0 

68.7 

148.6 

111.1 

155.6 

121 .8 

164.0 

119.1 

164.9 

123.5 

167.4 

136.9 

167.1 

150.3 

166.4 

153.2 

.  167.1 

147.4 

166.1 

145.9 

162.5 

140.4 

158.0 

134.2 

151.4 

135.4 

143.8 

139.0 

140.9 

139.4 

139.4 

143.0 

143.0 

150.7 

150.7 

152.9 

152.9 

159.2 

159.2 

155.1 

155.1 

112.1 

110.0 

111.0 

185U 

101.4 

109.8 

105.4 

1851 

102.1 

108.9 

105.4 

1852 

95.2 

107.3 

100.9 

1853 

95.2 

104.4 

99.6 

1854 

91.6 

102.6 

96.8 

1855 

89.0 

102.0 

95.1 

1856 

87.7 

100.8 

98.8 

1857 

88.3 

102.1 

94.7 

1858 

97.2 

100.3 

98.7 

1859 

100.0 

100.0 

100.0 

1860 

106.3 

99.3 

102.7 

1861 

98.4 

98.8 

98.6 

1862 

109.8 

122.1 

115.6 

1863 

90.3 

116.0 

101.6 

1864 

93.1 

145.5 

113.6 

1865 

74.6 

90.0 

81.6 

1866 

81.2 

82.1 

81.6 

1867 

79.6 

84.0 

81.7 

1868 

89.0 

80.9 

84.8 

1869 

84.0 

73.0 

78.2 

1870 

81.4 

66.5 

73.2 

1871 

82.4 

65.3 

72.8 

1872 

87.3 

67.8 

76.4 

1873 

85.8 

68.5 

76.2 

1874 

87.3 

71.2 

78.4 

1875 

92.0 

74.5 

82.3 

1876 

93.5 

73.9 

82.5 

1877 

96.9 

71.9 

82.6 

1878 

105.3 

71.8 

85.3 

1879 

95.3 

67.9 

80.7 

1880 

92.2 

66.4 

77.2 

1881 

91.7 

65.4 

76.3 

1882 

93.8 

62.8 

75.2 

1883 

97.5 

64.5 

77.6 

1884 

§  Average  prices  of  350  articles,  weighted  accordingf  to  consumption  of  each 
article. 

llBased  upon  wages  and  prices  in  gold,  as  in  the  Aldrich  Report  for  1891  and 
previous  years;  since  1891  on  Dun's  prices  and  I^abor  Bureau's  wages. 

(Contiued  in  following  pages) 


78 


GOLD  SUPPLY  AND  PROSPERITY 


Statistics  o!  Gold,  Money,  Interest  Rates, 

(continued  FRoar 


Per 

Interest 
Kates  on 

Prices 
(Wholesale) 

World's 

World'-S  Visible 
.Supply  of  Gnldt 

Capita 

60-day 
2-name 
pa  perl 

5 

Annual  Output 

Circula- 

By Inde.x 

-"2 

of  Gold* 

tion  of 

Numbers 

- 

Monev  in 

U.  S. 

Aldrich 

Report 

Yearly 

Gold 

Cur- 

Coinage 

Coinage 

%  In- 

Average 

rency 

Value 

Value  Dec.  31 

crease 

.Tune  30 

in  New 
York 

Jan.  1 

Jan.  1 

1885 

$108,435,600 

$3,532,309,000 

1.3 

23.02 

4.1 

93.3 

93.3 

1886 

106,163,900 

3,578,340,000 

1,3 

21.82 

4.7 

93.4 

93.4 

1887 

105,774,900 

3,624,080,000 

1.3 

22.45 

5.7 

94.5 

94.5 

1888 

110,196,900 

3,671,950,000 

1.3 

22.88 

4.9 

96.2 

96.2 

1889 

123,489,200 

3,726,371,000 

1.4 

22.52 

4.8 

98.5 

98.5 

1890 

118.848,700 

3,778,350,000 

1.3 

22.82 

6.0 

93.7 

93.7 

1891 

130,650,000 

3,836,230,000 

1.5 

23.42 

5.7 

94.4 

94.4 

1892 

146,651,500 

3,901,900,000 

1.7 

24.56 

4.3 

1893 

157.494,800 

3,965.900,000 

1.7 

24.03 

7.1 

1894 

181,175,600 

4,086,800,000 

3.0 

24.52 

3.4 

1895 

198.763,600 

4,143,700,000 

1.4 

23.20 

3.8 

1896 

202,251,600 

4,359,600,000 

5.2 

21.41 

5.8 

1897 

236.073,700 

4,594,900,000 

5.4 

22.87 

3.7 

1898 

286,879,700 

4,614,600,000 

.4 

25.15 

3.8 

1899 

306,724,100 

4,841,000,000 

4.9 

25.58 

4.1 

1900 

254,576,300 

4,906,700,000 

3.4 

26.94 

4.4 

1901 

262,492,900 

5,174,400,000 

4.0 

27.98 

4.3 

1902 

296,548,800 

5,382,600,000 

4.0 

28.43 

4.9 

1903 

325,527,20a 

5,628,200,000 

4.5 

29.42 

5.5 

1904 

346,892,200 

5,987,100,000 

6.4 

30.77 

4.2 

1905 

379,635,413 

6,300,000,000 

5.6 

31.19 

4.4 

1906 

400,000,000 

6,620,000,000 

32.42 

5.711 

1906 

December  1 

^Figures  for  1850  to  1S54  from  U.  S.  Mint  Report  for  1880;  1855  to  1873  from 
the  "Mineral  Industry,"  by  Charles  P.  Rothwell;  since  1873  by  Director  of  Mint. 

tEstimates  of  Moody's  ]\Iagazine  previous  to  1892;  and  for  1905  and  1906; 
1892  to  1904  by  Director  of  Mint. 

tFrom  "Appreciation  and  Interest,"  by  Prpf.  Irving  Fisher,  for  1895  and 
jirevious  years;  since  then  compiled  from  Financial  Chronicle. 

UTo  December  6th. 


THE  INCREASING  SUPPLY   OF   GOLD 


79 


Prices,  Wages  and  Relative  Value  of  Gold. 

PRECKDINrr    PAGKS.) 


Prices 
(Wholesale) 


By  Index 

Numbers 


By 

Index  Numbers 


l,al)or 
Kurt-au 


Av.  for 
Year 


[Aldrich    Report 


112.9 
111.7 
106.1 
105.6 
96.1 
93.6 
90.4 
89.7 
93.4 
101.7 
110.5 
108.5 
112.9 
113.6 
113.0 
115.9 

(Dec.  1) 


I)iin's§ 


99,902 
99,076 
90,191 
98.247 
89,822 
94,155 
86,032 
80,992 
77,780 
75,562 
79,940 
80,423 
95,295 
95,668 
101,587 
100,356 
100,142 
100,318 
104,464 
108.172 


Gold 


Cur- 
renc.v 


Jan.  1         Jan.  1     Jan.  1 


Labor 
Bureau 


Av.  for 
Year 


Appreciation  or 

Depreciation  of  (lold 

a.s  tested  by 


Prices 
Prices  ,  Wages        and 
I  i  Wages 


155.9 
155.8 
156.6 
157.9 
162.9 
168.2 
168.6 


155.9 
155.8 
156.6 
157.9 
162.9 
168.2 
168.6 


101.0 
100.8 
101.3 
101.2 
97.7 
98.4 
99.5 
99.2 
99.9 
101.2 
104.1 
105.9 
109.2 
112.3 
112.2 
114.0 


107.2 
107.1 
105.8 
103.9 
101.5 
106.7 
105.9 
111.3 
106.2 
115.0 
112.3 
128.5 
132.4 
125.1 
124.3 
104.9 
104.5 
98.4 
99.6 
99.8 
99.7 
95.7 


64.1 

1 
SO. 3 

64.2 

80.3 

63.9 

79.7 

63.3 

78.7 

61.4 

76.5 

59.5 

76.4 

59.3 

76.0 

59.1 

77.2 

59.2 

76.0 

61.3 

80.2 

60.8 

81.5 

60.2 

82.0 

60.4 

83.0 

60.0 

81.0 

59.2 

80.2 

57.5 

74.4 

56.6 

74.1 

54.8 

70.4 

53.3 

69.5 

.53.4 

69.6 

51.6 

68.7 

1SS5 
1886 
1887 
1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 
1906 


^Average  prices  of  350  articles,  wci.trhted  according  to  consumption  of  each 
article. 

llBased  upon  wages  and  prices  in  gold,  as  in  the  Aldrich  Report  for  1S91  and 
previous  years;  since  1891  on  Duns  prices   and  I/ibor  Btireau's  wages. 


80 


GOLD  SUPPLY  AND  PROSPERITY 


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CHART  I. 

■Ikumiik   Relation  Iktween  World's  Gold  Produclion  and  Prices,   Wages  and  Interest  in  United  States 


S  S  I  g  R 


§             8  8   1 

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lit  laSL 

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THE   INCREASING  SUPPLY   OF   GOLD  81 

Mulhall  estimates  the  world's  stock  of  gold'"  ap- 
proximately as  follows : 

GOLD,  MILLIONS  DOLLARS  AT  $4.86  TO  THE  POUND  STERLING 
VOOO  or  000,000  Omitted; 


A.  D. 

Coined 

Uncoined 

Total 

1600 

£    29 

$    140,940 

£    87 

$    422,820 

£    116 

$    563,760 

1700 

75 

364,500 

108 

524,880 

183 

889.380 

1£00 

126 

612,360 

256 

1,244,160 

382 

1,856,520 

1848 

157 

763,020 

343 

1,666,980 

500 

2,430,000 

1880 

735 

3,572,100 

357 

1,735,020 

1,092 

5,307,120 

1890 

790 

3,839,400 

445 

2,162,7C0 

1,235 

6.002,100 

1894 

3,973,535 

2,354,184 

6,327,720 

Spallart  estimated  the  actual  gold  coin  in  various 
countries  in  1855  at  £790  millions  sterling,  or  $3,839,- 
400,000. 

Dr.  Adolph  Soetbeer  in  1886  estimated  the  total 
monetary  supply  of  gold  at  the  close  of  1885  at  13,364,- 
000,000  marks,  or  $3,180,632,000. 

The  Monetary  Commission  in  its  report  in  1898 
said: 

"A  conservative  estimate  gives  the  total  available 
stock  of  the  world  in  1850  at  about  $2,000,000,000.  In 
the  last  forty-seven  years  (1851-1897)  gold  has  been 
produced  to  the  amount  of  over  $6,000,000,000,  so  that, 
even  allowing  a  deduction  of  $2,000,000,000  for  loss  by 
shipwreck,  abrasion,  use  in  the  arts,  etc.,  the  total  sup- 
ply is  now  more  than  three  times  that  in  1850." 

The  Director  of  the  Mint  estimates  the  world's 
stock  of  gold  in  1873  at  $1,209,800,000  and  in  1892  at 
$3,901,900,000.  He  gives  the  world's  product  of  gold 
from  1873  to  1892  as  $2,092,527,600.    That  these  figures 

*  Dictionary   of   Statistics,    1892   and   1896, 


82  GOLD  SUPPLY  AND  PROSPERITY 

are  worthless  for  the  purpose  of  comparison  is  evident 
from  the  fact  that  the  total  output  of  gold  from  1873  to 
1893,  added  to  the  world's  stock  in  1873,  fell  $599,572 
short  of  the  stock  in  1892.  And  yet  it  is  certain  that 
about  half  of  the  gold  produced  during  the  period  was 
used  in  the  arts  or  lost.* 

The  reports  of  the  Director  of  the  Mint  contain 
estimates  of  the  world's  stock  of  gold  for  1892  and  for 
each  year  since.  These  estimates  are  based  mainly 
upon  information  received  from  our  representatives  in 
foreign  countries.  They  include  only  the  gold  held  by 
banks  and  public  treasuries  and  that  "in  circulation" — 
an  indefinite  term.  The  gold  now  above  ground  and 
available  for  monetary  purposes  is  probably  30  to  40% 
greater  than  the  amount  in  sight.  We  can,  however, 
deal  only  with  the  visible  supply.  Undoubtedly  a 
much  larger  proportion  of  available  gold  is  now  coined 
and  visible  than  in  1873  or  1850. 

While  it  is,  perhaps,  true  that  the  available  stock 
of  gold  in  1850  was  above  $2,000,000,000,  it  is  probable 
that  the  amount  then  visible  was  much  less  than 
$2,000,000,000. 

Realizing  the  necessity  of  obtaining  figures  for 
comparison    purposes,    Moody's    Magazine    has,    after 


*Mr,  George  E,  Roberts,  Director  of  the  Mint,  m  a  letter  to  the 
Editor  of  Moody's  Magazine,   says  of  this  inconsistency: 

"  These  estimates  were  made  before  my  time,  but  permit  me  to 
make  an  explanation  concerning  them.  When  the  estimate  for  1873 
was  made,  it  was  exceedingly  difficult  to  obtain  figures  and  the  table 
contains  only  thirteen  countries.  When  the  table  for  1893  was  made 
more  data  was  available  and  that  table  contains  31  countries.  Both 
tables  were  confessedly  incomplete,  but  contained  all  that  could  be 
gathered  at  the  time  they  were  compiled.  The  tables  for  even  later 
years  show,  when  compared,  inconsistencies,  but  each  table  is  made  up 
from  information  obtained  through  inquiries  made  direct  to  the  foreign 
governments." 


THE  INCREASING  SUPPLY   OF   GOLD  83 

considering  all  these  various  estimates,  adopted  an 
arbitrary  method  of  making  estimates  for  years  pre- 
vious to  1892,  which,  it  is  believed,  produces  fairly  ac- 
curate results.  Adopting  the  estimates  of  the  Director 
of  the  Mint  for  the  years  1892  to  1903,  inclusive,  it  has 
taken  the  estimate  for  1892  as  a  base  and  has  made 
estimates  for  previous  years  on  the  supposition  that 
one-half  of  the  yearly  output  of  gold  was  used  for 
monetary  purposes  and  that  one-fifth  of  1%  of  all  gold 
in  existence  was  each  year  lost  in  some  way  to  the 
monetary  world.  In  this  way  it  arrives  at  the  estimate 
of  $1,606,400,000  as  the  visible  stock  of  gold  in  1850. 
It  is  believed  that  this  amount  was  as  visible  and  read- 
ily available  for  monetary  purposes  in  1850,  as  was  the 
$3,901,900,000  sighted  by  our  Treasury  in  1892,  or  the 
$5,628,200,000  found  when  the  world's  stock  of  gold 
was  taken  in  1903. 

From  these  statistics  we  observe  that  from  1850 
to  1855  the  world's  supply  of  gold  increased  about  20%, 
or  an  average  of  nearly  4^0  a  year;  that  the  annual 
yield  of  gold  in  1855  was  more  than  three  times  what 
it  was  in  1850;  that  prices"  were  22%  higher  in  1855 
than  in  1850;  that  wages  were  7.3%  higher  in  1855  than 
in  1850;  that  interest  rates  were  2.1  points  higher  in 
1855  than  in  1850. 

The  output  of  gold  continued  heavy  until  1860 
and  prices,  wages  and  interest  remained  high. 


*  The  statistics  of  prices  and  wages  quoted  on  this  and  the  fol- 
lowing page,  as  well  as  those  in  the  big  tables  on  pages  76-80  are  for 
the  United  States  only,  Similar  statistics  for  other  countries,  although 
believed   to   be   less  accurate,    show   the   same    general   result. 


84  GOLD  SUPPLY  AND  PROSPERITY 

Passing  over  the  period  of  the  Civil  War  and  the 
panic  of  1873,  we  see  that  from  1873  to  1890  the  annual 
output  of  gold  averaged  but  little  more  than  $100,- 
000,000,  and  the  yearly  increments  to  the  monetary 
supply  averaged  but  about  1%%.  Prices  and  interest 
tended  downward,  while  wages  rose  somewhat.  Al- 
though the  production  of  gold  increased  greatly  from 
1890  to  1895,  yet  the  yearly  increment  added  to  the 
supply  amounted  to  less  than  2%,  and  prices,  wages 
and  interest  rates  declined. 

From  1895  to  1900  the  gold  output  averaged  $257,- 
000,000  a  year  and  the  world's  stock  of  monetary  gold 
increased  3.8%  per  year.  Prices  rose  17  or  18% ; 
wages  nearly  6%  and  interest  rates  six-tenths  of  a  point. 

From  1900  to  1906  the  gold  output  averaged  $334,- 
000,000;  the  world's  stock  or  gold  increased  35%,  or 
an  average  of  about  4.9%  a  year.  Prices  rose  10%, 
wages  over  9C(^  and  interest  rates  1.3  points. 

Comparing  prices  with  the  per  capita  circulation 
of  money  we  do  not  find  that  similarity  of  relation 
which  the  quantity  theory  of  money  would  lead  us  to 
expect.  While  the  quantity  of  m.oney  is  now  more 
than  twice  what  it  was  from  1850  to  1860,  prices  are 
no  higher  now  than  then.  Prices  are  about  the  same 
now  as  in  1862,  although  there  are  three  times  as  many 
dollars  per  capita  now  as  then.  Since  1897  prices  have 
risen  about  40%  while  the  per  capita  quantity  of 
money  has  increased  about  42%.  It  should,  however, 
be  noted  that  because  of  improved  methods  of  pro- 
duction the  trend  of  prices  should  be  downward,  par- 
ticularly when  periods  of  20  or  more  years  are  consid- 
ered. 


THE  INCREASING  SUPPLY  OF  GOLD  85 

Comparing  the  purchasing  power  of  gold  at  dif- 
ferent periods  we  see  that  a  dollar  now  will  buy  about 
the  same  quantity  of  goods  as  in  1884  or  in  1859,  much 
less  than  from  1885  to  1901  and  more  than  from  1864 
to  1884,  omitting  the  exceptional  year  1879.  Measured 
by  wages  the  purchasing  power  of  a  dollar  is  now  only 
half  what  it  was  in  1852  or  1853  and  two-thirds  what 
it  was  in  1869. 

This  means  that  nominal  wages  are  now  twice 
what  they  were  in  the  fifties,  and  50%  higher  than  in 
the  years  from  1866  to  1870.  Measured  by  both  prices 
and  wages  the  dollar  will  now  purchase  less  than  70% 
of  what  it  would  in  1860  or  '64,  only  four-fifths  as  much 
as  in  1869  or  1879  and  only  five-sixths  as  much  as  in 
1896.  That  is,  measured  by  prices,  gold  has  depre- 
ciated 30%  since  1896,  and,  measured  by  both  prices 
and  wages,  gold  has  depreciated  16%?  since  1896.  It 
is  evident,  then,  that  the  appreciating  dollar  which 
caused  so  much  trouble  in  1896,  is  a  thing  of  the  past. 
The  robber  dollar  of  today  is,  according  to  Mr.  Bryan's 
theories,  stealthily  extracting  money  from  the  pockets 
of  the  rich  creditors  and  giving  it  to  the  poor  debtors. 


MAURICE  L.  MUHLEMAN 


Ex-Deputy    Assistant   Treasurer   of   the    United     Stales 


Gold  Supply  Not  too  Great 

Uy  ^Iaurice  L.  AIuhlEman 

DEFORE  proceeding  to  the  consideration  of  the 
question  of  the  influence  of  the  rapidly  increasing 
gold  supply,  it  is  proper  to  say  that  the  table  sub- 
mitted, presenting  the  volume  of  monetary  gold  for 
the  purpose  of  comparison  with  the  fluctuation  of 
prices,  wages  and  interest  rates,  is  unsatisfactory,  for 
the  reason  that  it  limits  the  statement  of  the  supply  of 
money  to  gold,  whereas  silver,  certainly  for  the  period 
prior  to  1873,  and  in  a  diminishing  degree  only  since 
that  date,  was  endowed  with  full  money  functions ; 
hence  if  the  volume  of  money  is  an  important  factor, 
the  deductions  from  the  table  will  in  all  probability  be 
erroneous.  The  same  may  be  said  respecting  the 
omission  to  include  paper  representatives  of  money, 
the  use  of  which  unquestionably  potentially  influences 
the  conditions  that  cause  price  fluctuations.  Moreover 
the  volume  of  gold  of  the  entire  world,  is  compared 
with  prices,  wages  and  interest  rates  for  the  United 
States  alone;  it  is  not  only  conceivable,  but  demon- 
strable, that  circumstances  influencing  only  the  United 
States,  have  been  potential  in  causing  fluctuations 
there,  in  very  large  measure  irrespective  of  the  supply 
of  gold  in  the  rest  of  the  world. 

87 


88  GOLD  SUPPLY  AND  PROSPERITY 

Coming  now  to  the  specific  topic  for  discussion,  it 
is  obvious  that,  as  gold  has  been  made  the  chief,  and  in 
the  most  important  states  the  sole,  medium  of  ex- 
change and  measure  of  values,  a  very  marked  change 
in  prices,  wages  and  interest  may  be  looked  for  within 
a  decade,  unless  the  additional  supply  is  offset  by  new 
demands.  Other  channels  for  the  employment  of  the 
surplus  of  gold  have  been  or  will  be  suggested  as  likely 
to  avert  a  radical  disturbance  in  the  markets;  I  con- 
fine myself  to  the  one  of  reserves. 

Regarding  the  adaptation  and  adjustment  of  our 
artificial  or  conventional  methods  to  the  changing 
natural  conditions  as  a  primary  obligation  of  the 
civilized  state,  no  utilization  of  the  added  gold  supply 
to  the  promotion  of  the  well-being  of  the  race  would 
be  more  rational  than  its  employment  in  fortifying 
the  reserves  of  financial  institutions.  No  one  who  has 
given  the  subject  more  than  merely  superficial  consid- 
eration will  question  the  assertion  that  such  strength- 
ening is  necessary  if  we  would  protect  the  credit  struc- 
ture adequately  against  the  periodic  dangers  to  which 
it  is  exposed ;  dangers  which  so  frequently  bring  about 
disasters,  the  effects  of  which  are  felt  for  a  decade, 
during  which  a  very  substantial  portion  of  the  race  is 
subjected  to  misery,  inevitably  retarding  the  progress 
of  civilization. 

We  are  informed  by  statisticians  that  the  volume 
of  "uncovered  paper  money"  is  approximately  $3,500,- 
000,000 ;  we  know  that  a  considerable  number  of  states 
are  struggling  with  a  depreciated  paper  standard. 
Moreover,  it  is  well  known  that  in  estimating  the  un- 
covered paper  volume,  the  specie  in  bank  is  all  used  to 


GOLD  SUPPLY  NOT  TOO  GREAT       89 

offset  note  liabilities,  leaving  nothing  against  deposit 
or  other  credit  liabilities ;  and  a  substantial  part  of  the 
covering  specie  consists  of  silver.  Here,  then,  is  a 
broad  field  for  the  employment  of  the  increasing  gold 
product,  sufficient  to  absorb  the  available  output  for 
a  decade  or  more,  which  governments  should  recog- 
nize. 

To  illustrate  concretely:  In  the  United  States  we 
should  have  some  200  millions  more  of  gold  in  place 
of  our  "greenbacks,"  150  millions  as  a  reserve  against 
our  silver  issues ;  our  banks  should  actually  hold  their 
prescribed  reserves  instead  of  being  permitted  to  loan 
them  out  in  part,  which  would  require  a  further  pro- 
vision of  say  200  millions ;  our  trust  companies  are 
notoriously  deficient  in  this  respect  and  should  be 
called  upon  to  fortify  themselves,  which  would  give 
room  for  a  further  200  millions.  In  London  the  joint 
stock  banks  actually  carry  such  insignificant  cash 
reserves  against  their  2300  millions  of  deposits,  that 
there  is  an  almost  continuous  protest  against  the  dan- 
gerous practice ;  there  a  very  large  amount  of  gold 
could  and  should  be  gathered  to  assure  stability  which 
today  exists  largely  only  in  the  imagination,  and  only 
fortuitous  circumstances  avert  trouble.  At  the  mo- 
ment there  comes  to  hand  another  protest  from  the 
London  Statist  against  this  disregard  of  conservative 
regulations,  instancing  the  present  stringency  there  as 
a  result  of  the  practice. 

It  is  not  necessary  to  furnish  a  complete  catalogue 
of  the  illy-fortified  financial  institutions;  those  cited 
prove  the  need  and  this  is  sufficiently  important  to 
merit  the  persistent  attention  of  the  best  thought  of  the 


90  GOLD  SUPPLY  AND  PROSPERITY 

day  in  governmental  and  financial  circles.  It  may  have 
been  excusable  in  the  period  of  slender  gold  output  to 
permit  reserves  to  shrink;  that  excuse  is  now  no 
longer  permissible;  and  while  there  are  no  doubt 
other  channels  in  which  the  extraordinary  supply  of 
yellow  metal  can  be  used,  none  would  so  readily  pre- 
vent inordinate  market  fluctuations,  at  the  same  time 
tending  to  avert  the  disasters  following  inadequate 
reserves,  which  so  frequently  interfere  with  the  steady 
progress  in  our  economic  evolution. 


JOHN  B.  CLARK 

Professor    of    Political    Economy,    Columbia    University 


Money,  Interest  Rates  and  Prosperity 

IJy  Pk(ji".  j(jiix  1!.  Clark 

1-J  OW  many  mistakes  we  should  avoid  and  how 
many  perplexing  tangles  we  should  straighten, 
if  only  we  could  see  clearly  how  money  acts  in  various 
connections.  Interest,  business  profits,  wages  and 
prices  all  seem  to  depend  on  the  supply  of  money,  and 
it  is  instinctive  to  conclude  that  the  more  there  is  of  it 
the  better  off  every  one  is.  Quite  natural  is  it  to  think 
that,  if  the  volume  of  the  currency  were  to  grow  for- 
ever larger  and  larger  and  if  this  growth  were  to  out- 
strip the  increase  of  business  to  be  done  by  means  of 
of  it,  so  that  prices  would  rise  and  continue  rising  to 
the  end  of  time,  we  should  have  an  ideal  condition 
for  business,  and,  in  so  far  as  business  can  ensure  it, 
for  general  happiness. 

Let  us  see  what  would  follow  such  a  permanent 
increase  in  the  volume  of  currency.  At  the  outset  of 
the  movement  producers  would  get  a  profit  in  conse- 
quence of  it.  Men  who  borrow  money,  buy  goods  and 
sell  them  would  be  able  to  get  higher  prices  for  them 
than  those  which  prevailed  at  the  time  of  the  purchase, 
and  this  would  signify  a  gain  in  addition  to  the  regular 
gain  that  comes  from  commercial  dealing.  If  I  buy 
goods,  as  a  rule,  at  a  wholesale  rate,  that  is  20%  less 
than  the  retail  rate,  I  can  make  this  amount  when 
prices  are  stable,  and  it  is  clear  that  I  can  make  more 
if  they  rise.     If  by  the  time  I  sell  the  goods  they  have 

93 


94  GOLD  SUPPLY  AND  PROSPERITY 

gone  up  5%  in  value,  I  make  25%  instead  of  20%. 
1  am  "doing  business  in  a  rising  market"  and  every 
merchant  knows  what  that  means.  If  the  rise  is  a 
sudden  one  and  if  nothing  happens  that  will  take  the 
extra  profit  from  me,  I  am  a  real  gainer. 

In  the  long  run  something  will  happen  that  will 
neutralize  my  especial  profit.  The  case  supposed 
assumes  that  I  borrow  the  money  which  buys  the 
goods  and  in  this  fact  lies  my  profit.  I  can  sell  the 
goods  for  such  a  price  that  my  debt  will  be  easily  paid. 
With  prices  unchanging  I  could  invest  a  thousand 
dollars  in  goods,  sell  them  for  eleven  hundred,  pocket 
the  one  hundred  as  a  gross  profit  and  pay  my  loan  with 
what  I  have  left.  With  prices  rising  I  can  pay  the 
debt  and  have  more  than  a  hundred  dollars  left.  If  the 
goods  are  worth  at  the  time  of  sale  eleven  hundred 
and  fifty  dollars,  the  extra  fifty  constitutes  a  special 
gain  due  to  the  rising  prices. 

This  gain  is  made  at  the  cost  of  the  man  who 
loaned  the  money.  I  shall  pay  him  the  thousand 
dollars  that  I  owe,  but  it  will  have  lost  some  of  its  pur- 
chasing power.  He  can  himself  get  less  in  the  way  of 
goods,  land,  or  what  not  than  he  could  have  bought 
with  the  same  sum  at  the  time  he  made  the  loan.  He 
has  suffered  a  real  loss  on  the  principal  of  his  loan  and 
it  may  even  sweep  away  all  his  interest.  What  is  more 
likely  is  that  it  will  scale  dov/n  his  returns  without 
entirely  destroying  them.  He  may  have  charged  me 
5%  for  the  loan  and  the  prices  of  all  manner  of  real 
goods  may  have  gone  up  about  2%  ;  and  if  that  is  so, 
he  has  lost  about  2%  through  the  shrunken  value  of 
the  principal   of  his  loan.      His   gain  from   interest   is 


MONEY,  INTEREST  RATES  AND  PROSPERITY  95 

reduced  to  3''A .  If  real  capital  is  earning  5^/r  all  the 
while,  he  will  have  to  make  new  loans  at  l^r  in  order 
to  repay  himself  for  the  shrinkage  in  the  purchasing 
power  of  the  principal  of  his  loans  and  save  5/V  as  net 
interest. 

This  he  will  seek  to  do  and  he  will  be  able  to  do 
it.  Interest  is  governed  by  the  earning  jDower  of  real 
capital,  or  capital  in  the  shape  of  tools,  buildings, 
stocks  of  merchandise,  etc.  If  a  dealer  in  wheat  can 
make  5%  a  year  in  wheat — if  for  every  hundred 
bushels  that  he  has  on  hand  at  the  beginning  of  a  year 
he  has  a  hundred  and  five  at  the  end — that  represents 
the  real  increase  of  his  productive  fund.  With  prices 
going  up  at  the  rate  of  2%  a  year,  he  is  making  7%  in 
money.  That  is  about  what  competition  will  make 
him  pay  for  whatever  money  he  borrows. 

It  takes  time  for  the  interest  on  loans  to  adjust 
itself  to  a  continued  and  steady  rise  in  prices,  but  in 
the  end  it  does  this  surely  and  completely.  Lenders 
cannot  otherwise  get  interest  and  avoid  making 
a  sacrifice  on  their  principal.  Borrowers  have  to  pay 
enough  to  enable  them  to  do  this,  for  competition  sees 
to  that.  So  long  as  producers  can  make  a  shade  more 
than  regular  interest  by  borrowing  money  and  putting 
it  into  their  business  they  will  compete  with  each  other 
for  loans  till  they  bring  the  rate  of  interest  up  to  the 
point  at  which  the  gains  in  real  capital — the  five 
bushels  of  wheat  that,  in  our  illustration,  have  grown 
out  of  the  handling  of  the  hundred  bushels — are  made 
over  as  a  net  interest  to  lenders. 

A  long  continued  and  steady  rise  in  prices  adds 
to  the  rate  of  interest  in  loans.     It  adds,  in  the  long 


96  GOLD  SUPPLY  AND  PROSPERITY 

run,  just  enough  to  make  good  to  lenders  the  shrink- 
age in  the  purchasing  power  of  their  capital.  At  the 
outset  of  the  upward  movement  in  prices  it  does  not 
do  this.  For  a  time  lenders  are  losers  and  borrowers 
are  gainers  from  the  boom  in  the  value  of  merchan- 
dise; but  in  the  end  interest  conforms  to  the  earning 
power  of  real  capital.  It  gives  the  lenders  this  amount, 
besides  recouping  them  for  the  higher  prices  of  goods 
— that  is  for  the  shrinkage  in  the  purchasing  power  of 
the  principal  of  their  loans.  A  quick  and  brief  rise  in 
prices  means  a  profit  for  the  borrowers ;  but  a  steady 
and  permanent  one  means  nothing  but  an  addition  to 
the  rate  of  interest  on  money. 

If  the  upward  trend  of  prices  that  has  been  the 
feature  of  the  past  few  years  should  be  permanent — 
if  the  output  of  gold  should  outgrow  the  volume  of 
business,  as  some  persons  seem  to  think  it  will — a  high 
rate  of  interest  on  loans  will  be  a  permanent  fact.  It 
will  not  have  to  be  a  perpetually  rising  rate,  but  only 
a  rate  that  shall  be  and  remain  higher  by  a  certain 
fixed  amount  than  the  earnings  of  real  capital  as  com- 
puted in  kind.  It  is  morally  certain  that  some  part  of 
the  increase  on  loans  which  has  lately  taken  place  is 
due  to  this  cause.  A  mere  scarcity  of  curirency  causes 
an  apparent  rise  in  interest,  which  is  really  nothing 
but  a  premium  on  the  circulating  medium  itself.  If 
horses  had  the  distemper  and  groceries  had  to  be  de- 
livered by  special  messengers  going  afoot,  the  grocers 
might  charge  something  for  such  deliveries  and  the 
goods  when  they  reach  us  might  be  dear.  Money  is  a 
carrier — a  means  of  transferring  real  value  from  hand 
to   hand — and  when   it   is   momentarily  scarce   a  pre- 


Prices  are  taken  from  Uie  Aldrich  (Senate)  Report,     After  1889  from  Dun's  Index  Numbers.     They  were  but  half  a  point  apart  in  1 


il72  in  1864;  232  in  1865; 


;  166  in  1867;   17- 


n 


MONEY,  INTEREST  RATES  AND  PROSPERITY  97 

mium  has  to  be  paid  for  the  use  of  it.  This  counter- 
feits a  rise  in  actual  interest,  but  is  by  no  means  the 
same  thing.  Such  a  premium  on  currency  recently 
appeared;  but  together  with  it  and  outlasting  it  is  a 
rise  in  the  rate  of  interest  on  loans,  which  is,  without 
much  doubt,  the  offset  that  lenders  are  now  getting 
for  rising  prices. 

Permanently  high  prices  due  to  a  permanent 
abundance  of  gold  would  have  no  such  effect.  It  is 
only  when  the  prices  are  in  the  process  of  rising  that 
the  higher  charge  for  loans  is  made.  Prices  high  but 
steady  mean  that  the  increase  of  productive  capital, 
as  it  takes  the  form  of  goods,  is  accurately  expressed 
by  the  rate  charged  for  money  loaned.  However  high 
wheat  may  be  selling — whether  it  commands  a  dollar 
or  two  dollars  a  bushel — if  the  dealer  gains  five  bushels 
per  hundred,  the  capitalist  who  lends  the  money  that 
enables  him  to  carry  the  wheat  gets — or  tends  nor- 
mally to  get — five  dollars  per  hundred  for  his  loan. 
Suddenly  rising  prices  help  the  borrower  and  hurt  the 
lender.  Permanently  rising  prices  help  neither  of 
them,  but  make  nominal  interest  high.  Permanently 
high  prices  do  none  of  these  things.  They  take 
nothing  from  the  gains  of  any  class  engaged  in  com- 
mercial transactions.  For  men  living  on  fixed  salaries 
they  have  their  significance  and  it  is  only  too  apparent ; 
yet  wages  and  many  salaries  adjust  themselves  in  the 
end  to  the  high  level  of  the  cost  of  goods;  and  if  this 
were  a  universal  fact  there  would  be  neither  gains  nor 
losses  to  be  expected  by  any  class  in  consequence  of 
the  permanent  abundance  of  money. 


w 


THE  LATE  WALTER  S.  LOGAN 


The    Duty    of   Gold 

By  Walter  S.  Logan 

TN    technical    speech    the    duty    of    anything    is    the 

amount  of  work  it  can  do ;  the  service  it  can  per- 
form. 

Webster  in  defining  the  word  as  appHed  to  engi- 
neering says: 

"The  efficiency  of  an  engine,  especially  a  steam 
pumping  engine,  as  measured  by  work  done  by  a  cer- 
tain quantity  of  fuel;  usually  the  number  of  pounds 
of  water  lifted  one  foot  by  100  pounds  of  coal." 

Gold,  as  the  foundation  of  the  currency  of  the 
world — as  the  universal  measure  of  value — has  a  cer- 
tain duty  to  perform.  The  gold  in  the  world  at  any 
given  time  has  to  serve  as  the  ultimate  measure  of 
values  for  all  the  commercial  transactions  going  on  at 
that  time.  Other  things  being  equal  and  other  con- 
ditions the  same,  if  the  gold  available  for  money  bears 
a  lower  ratio  to  the  commercial  transactions  dependent 
upon  it,  its  duty  is  greater — each  ounce  of  gold  has 
more  work  to  do. 

As  the  gold  increases  in  proportion  to  the  work  to 
be  done,  the  duty  of  each  particular  ounce  of  gold  is 
diminished. 

This  duty  of  ultimately  measuring  values  is  now 
practically  performed  throughout  the  world  by  gold 
alone.     Even  in  the  countries  where  there  is  still  free 


99 


100  GOLD  SUPPLY  AND  PROSPERITY 

coinage  of  silver,  gold  is  nevertheless  practically  the 
standard  of  values,  and  prices  in  all  foreign  and  most 
domestic  transactions  are  determined  by  the  rate  of 
exchange.  A  generation  or  so  ago  this  duty  now  per- 
formed by  gold  alone,  was  divided  between  gold  and 
silver.  There  was  free  coinage  of  both  metals  in  coun- 
tries enough  to  make  both  of  them  real  standards  of 
value  upon  a  pretty  definite  ratio.  Then  the  world's 
commercial  transactions  were  based  upon  the  total 
stock  of  gold  and  silver  in  the  world  available  for 
money  uses.  The  demonetization  of  silver — that  is, 
the  fact  that  the  leading  commercial  countries  of  the 
world  ceased  to  admit  silver  to  their  mints  on  the  basis 
of  free  coinage,  whatever  the  reasons  for  their  action 
may  have  been — took  away  half  of  the  world's  ultimate 
money,  and  imposed  upon  the  other  half  the  duty  for- 
merly performed  by  the  whole.  The  result  was  a 
scarcity  of  gold,  an  increase  in  its  value,  and  a  universal 
fall  in  prices  to  correspond  with  such  increase.  The 
bushel  measure  had  become  bigger  and  so  there  were 
fewer  bushels  in  every  bin. 

Of  course  the  expression  I  have  used,  "a  universal 
fall  in  prices,"  must  be  taken  in  a  general  sense.  The 
prices  of  some  commodities  did  not  actually  fall,  be- 
cause other  conditions  were  at  work  at  the  same  time 
which  tended  to  make  them  rise.  In  such  cases,  in- 
stead of  an  actual  fall  in  the  price  of  the  commodities 
there  was  only  less  of  a  rise  than  there  otherwise  would 
have  been,  but  the  tendency  was  universal.  All  prices 
fell  unless  there  were  conditions  to  make  them  rise 
which  counteracted  the  fall.  The  increase  in  the  size  of 
the  bushel  measure  was  universal,  but  in  some  excep- 


THE  DUTY   OF  GOLD  101 

tional  cases  the  size  of  the  bin  had  also  been  increased. 
The  result  of  this  increased  duty  imposed  upon  the 
one  standard  metal,  and  which  increased  the  value 
of  that  metal  and  so  decreased  the  price  of  every- 
thing else  which  was  measured  by  it,  was  to  increase 
the  profits  of  producing  gold  and  so  encourage 
its  production.  The  demonetization  of  silver  turned 
the  whole  world  loose  looking  for  gold  mines,  and  now 
the  chickens  that  were  hatched  a  generation  ago  are 
coming  home  to  roost.  The  world  that  turned  itself 
loose  looking  for  gold  mines  has  found  them,  and  the 
gold  is  increasing  so  that  the  stock  of  it  in  the  world  is 
greater  than  the  stock  of  gold  and  silver  together  was 
a  generation  ago.  The  production  is  still  increasing  at 
a  phenomenal  rate.  It  doubles  about  every  ten  years. 
Of  course  it  cannot  go  on  in  this  geometric  ratio  for- 
ever, but  the  end  is  not  yet  in  sight.  The  best  esti- 
mate is  that  there  are  about  six  thousand  millions  of 
dollars  in  gold  available  for  currency  in  the  world  to- 
day. The  production  is  now  about  four  hundred  mil- 
lions a  year  and  is  increasing  twenty  millions  and  more 
every  year.  Some  of  it  is  used  in  the  arts,  but  the 
increase  of  its  use  in  the  arts  is  much  slower  than  the 
increase  in  its  production,  so  that  every  year  a  larger 
and  larger  percentage  of  the  gold  produced  becomes 
available  for  money  uses.  It  is  pretty  safe  to  say  that 
the  gold  money,  or  the  gold  available  for  money  in  the 
world,  will  double  during  the  next  fifteen  years,  so  that 
instead  of  six  thousand  million  dollars  that  we  have 
to-day  we  shall  have  twelve  thousand  million  dollars 
of  it  fifteen  years  from  now. 


102  GOLD  SUPPLY  AND  PROSPERITY 

Meantime  the  commercial  transactions  of  the 
world  are  increasing,  but  by  no  means  as  fast  as  the 
amount  of  gold  is  increasing,  and  besides  we  are  every 
day  learning  new  tricks  in  the  way  of  making  every 
ounce  of  gold  do  greater  work.  The  art  of  banking  is 
advancing  with  the  other  arts.  The  domestic  clearing 
bouse  makes  necessary  only  the  payment  of  local  daily 
balances,  and  the  great  banking  houses  of  the  world 
have  now  established  what  is  practically  a  clearing 
house  for  even  international  transactions,  so  that  there 
is  every  year  a  greater  and  greater  exchange  of  credits 
and  less  and  less  payments  and  shipments  of  gold.  If 
we  say  that  twenty  years  from  now  there  will  be  twice 
as  much  gold  in  the  world  available  for  money  in  pro- 
portion to  the  demand  there  will  be  for  its  use  as 
money,  we  shall  be  quite  within  the  mark.  An  ounce 
of  gold  will  then  have  only  half  its  present  duty  to 
perform. 

The  practical  result  is  likely  to  come  much  sooner, 
for  we  are  learning  fast  to  utilize  the  productions  of 
the  future  in  the  markets  of  the  present.  A  short  time 
ago  we  saw  in  the  market  reports  that  the  price  of 
wheat  had  fallen  in  London  on  account  of  Russian 
offerings,  made  possible  by  the  peace  between  Russia 
and  Japan.  Not  a  bushel  of  that  wheat  had  arrived  in 
London.  Probably  very  little  of  it  had  got  as  far  as 
Odessa.  Most  of  it  was  still  in  the  Russian  harvest 
fields,  not  ever  threshed,  but  still  it  could  be  sold  in 
Ivondon  just  the  same  as  if  it  was  actually  there.  The 
exporters  at  Odessa  had  their  agents  through  the  grain- 
growing  regions  of  Russia  and  were  able  safely  to  buy 


THE  DUTY   OF  GOLD  103 

the  grain  from  the  farmers  for  future  delivery  and  to 
sell  it  to  the  English  importers  also  for  future  delivery, 
and  the  English  importers  could  depend  on  its  arrival 
in  England  in  time  to  fill  their  orders. 

The  price  of  each  year's  cotton  crop  is  practically 
fixed  and  a  large  part  of  it  sold  before  the  cotton  is 
picked — as  soon  as  a  good  guess  can  be  made  as  to 
how  much  is  likely  to  be  produced. 

The  effect  of  the  gold  production  for  twenty  years 
to  come  begins  to  be  felt  as  soon  as  the  financial  world 
is  satisfied  as  to  what  that  production  is  going  to  be, 
and  the  duty  of  the  ounce  of  gold  commences  to  di- 
minish the  moment  we  can  see  how  many  more  ounces 
there  are  to  be  at  some  future  time  to  do  that  duty. 
If  the  world  is  sure  that  in  twenty  years  there  will  be 
twice  as  much  gold  as  there  is  now  to  do  the  same 
duty,  we  shall  get  pretty  nearly  the  full  effect  of  the 
mcrease  within  ten  years  and  we  begin  to  get  the 
effect  at  once. 

This  is  what  is  now  happening.  It  is  not  so  much 
the  actual  as  the  threatened  increase  that  there  has 
been  of  the  stock  of  gold  in  the  world  that  is  sending 
prices  skyward  and  demoralizing  credits.  Of  course 
the  increase  in  the  production  of  gold  must  finally 
come  to  an  end.  The  time  will  come  when  gold  mining 
will  be  unprofitable  and  the  world  will  turn  its  energies 
that  are  now  devoted  to  gold  mining  to  other  things; 
but  the  change  will  of  necessity  come  slowly.  As- 
suming arbitrarily  that  it  now  costs  $10  to  produce  $20 
worth  of  gold — the  estimate  made  for  the  mines  of 
the  Rand — the  time  will  come  when  the  prices  of  labor 


104  GOLD  SUPPLY  AND  PROSPERITY 

and  other  commodities,  measured  in  gold,  will  rise  to 
such  a  point  that  it  will  cost  $10  to  produce  $10  worth 
of  gold ;  but  the  effect  upon  production  will  not  be  im- 
mediate even  then.  The  pendulum  will  not  stop  at  the 
thirty-minute  mark,  but  always  swings  beyond. 
Things  will  go  on  until  it  costs  $10  to  produce  seven 
or  eight  dollars  worth  of  gold. 

There  are  three  reasons  why  such  a  result  is  sure 
to  come: 

1.  The  general  inertia  of  mind  as  well  as  matter. 
Business  men  acquire  habits  that  are  hard  to  change 
and  they  continue  to  do  things  which  were  once  profit- 
able long  after  the  profit  has  disappeared.  They  con- 
tinue to  hope  against  hope  for  a  return  of  the  old 
conditions. 

2.  This  inertia  is  especially  noticeable  in  a  busi- 
ness like  that  of  the  production  of  gold.  It  requires  an 
immense  capital  and  an  extensive  outfit  and  equip- 
ment. Half  the  cost  of  producing  an  ounce  of  gold  is 
in  getting  ready  to  produce  it ;  and  when  you  have  got 
ready  you  cannot  afford  to  stop  the  actual  production 
even  though  it  may  be  at  a  loss.  If  it  costs  ten  million 
dollars  to  produce  twenty  million  dollars'  worth  of 
gold,  five  millions  of  the  ten  millions  would  probably 
be  spent  in  the  development  and  equipment  of  the 
mines  and  reduction  works — in  getting  a  plant. 
Having  spent  this  five  million  dollars,  the  producers 
would  have  to  go  on  and  spend  the  other  five  millions 
even  though  they  found  that  the  gold  they  would 
produce  would  be  worth  only  six  million  dollars  in- 
stead of  twenty  millions,  and  the  production  would  be 


THE  DUTY   OF  GOLD  105 

likely  to  continue  years  and  years  after  the  profit  had 
disappeared. 

3.  A  large  proportion  of  the  gold  of  the  world — 
and  an  increasing  proportion — is  produced  as  a  by- 
product in  the  production  of  other  metals,  especially 
copper.  Most  of  the  great  copper  mines  of  the  world 
produce  some  gold.  A  few  produce  greater  values  in 
gold  than  in  copper;  others  less  amounts.  The  reduc- 
tion in  the  value  of  the  gold  would  not  necessarily 
interfere  with  its  production.  There  might  be  a  profit 
in  the  production  of  the  copper  without  the  gold,  and 
the  production  would  go  on  without  much  change  even 
though  the  value  of  the  gold  should  be  reduced  very 
materially  indeed.  Copper  production  is  increasing 
rapidly  and  the  production  of  gold  as  a  by-product  in- 
creases with  it. 

For  these  reasons  I  think  I  am  within  limits  in 
stating  that  the  production  of  gold  is  likely  to  con- 
tinue to  increase  for  twenty  years  to  come  at  least,  and 
that  when  the  increase  ceases  the  decrease  will  be  very 
gradual  indeed. 

When  the  process  gets  through — when  the  pendu- 
lum has  had  its  full  swing  both  ways  and  come  to  a 
standstill — the  world  will  have  on  hand  a  tremendous 
stock  of  the  yellow  metal,  enough  to  cut  its  value  down 
to  one-half,  if  not  to  one-quarter;  that  is,  enough  to 
double,  if  not  quadruple,  the  price  of  other  com- 
modities. 

I  am  going,  however,  farther  than  I  intended  into 
the  region  of  economics.  A  lawyer  has  to  be  a  practical 
man  whether  he  will  or  not.     Clients  come  to  him  for 


106  GOLD  SUPPLY  AND  PROSPERITY 

advice  not  as  to  general  tendencies,  but  as  to  specific 
things.  They  ask  him  not  what  he  thinks  of  coming 
events  generally  ten  or  twenty  years  off,  but  what 
they  shall  do  to-day;  whether  they  shall  buy  a  certain 
bond  or  stock  that  is  offered  them  for  investment  and 
as  to  the  purchase  of  which  they  have  to  give  an  im- 
mediate answer. 

How  is  this  increase  in  the  production  of  gold  and 
the  consequent  diminution  in  the  value  of  the  ounce 
of  gold,  or  increase  in  the  price  of  commodities  meas- 
ured by  the  ounce  of  gold,  to  affect  investments? 

L  The  first  effect  must  be  to  increase  the  value 
of  the  share  of  stock  and  diminish  the  value  of  the 
bond.  A  railroad  that  is  now  worth  $10,000,000  has 
that  value  represented  perhaps  by  $5,000,000  of  bonds 
and  $5,000,000  of  stock.  Twenty  years  from  now — and 
it  may  be  not  more  than  ten — with  the  amount  of  gold 
in  the  world  available  for  money  doubled,  and  so  its 
value  diminished  and  the  bushel  measure  made 
smaller,  the  railroad  will  be  worth  in  the  money  of 
that  day,  say  $20,000,000.  The  nominal  value  of  the 
$5,000,000  worth  of  bonds  would  remain  the  same 
and  the  rest  of  the  value  of  the  property,  then  nomi- 
nally $15,000,000,  would  be  represented  by  the  stock, 
and  the  stock  would  be  nominally  worth  three  times 
what  it  is  now  and  really  worth  once  and  a  half  as 
much,  for  the  bond  remaining  the  same  in  nominal 
value,  would  have  only  half  its  former  real  value — you 
could  buy  only  half  as  much  of  anything  you  wanted 
with  the  money  you  would  receive  either  for  principal 
or  interest,  for  the  principal  and  interest  would  both 
be  paid  in  gold  and  the  gold  would  be  worth  only  half 


THE  DUTY   OF   GOLD  107 

as  much  as  before.  A  man  who  invests  his  fortune  in 
bonds  to-day  and  holds  them  twenty  years — meantime 
spending  just  his  income  and  making  no  gains  or 
losses — will  find  his  fortune  then  nominally  just  the 
same  as  it  is  now,  but  really  it  will  be  only  half  as  large. 
The  man  who  invests  in  stock  where  half  the  value 
of  the  property  is  represented  by  underlying  bonds, 
assuming  that  he  makes  an  intelligent  investment 
which  pays  him  a  fair  interest  and  that  there  is  no  de- 
preciation in  real  values,  will  find  that  he  has  a  fortune 
nominally  three  times  as  large  as  he  has  now  and 
really  one  and  a  half  times  as  large,  for  he  will  have 
in  addition  to  the  fortune  with  which  he  started  half 
the  fortune  of  the  man  who  bought  the  bonds  that  are 
under  his  stock. 

The  moral  is,  don't  buy  bonds  of  any  kind  now  for 
long  investment. 

2.  The  effect  upon  investments  based  upon  fran- 
chises is  likely  to  be  very  serious.  Take,  for  instance, 
the  Metropolitan  Street  Railway  securities  or  the 
Brooklyn  Rapid  Transit  securities,  which  are  de- 
pendent upon  the  operations  of  the  New  York  City 
Railway  Company  or  the  Brooklyn  Heights  Railway 
Company.  The  companies  pay  now,  we  will  assume, 
three  dollars  a  ton  for  coal  and  two  dollars  a  day  for 
labor.  If  the  gold  goes  down  50'' K  coal  and  labor 
would  go  up  100%  to  give  the  coal  miner  the  same 
price  for  his  coal  and  the  laborer  wages  of  the  same 
purchasing  power.  These  two  railway  companies  re- 
ceive five  cents  fare  for  carrying  each  passenger,  and 
the  amount  is  limited  by  law.  It  will  be  a  cold  day 
for  either  company,  unless  public  sentiment  changes 


108  GOLD  SUPPLY  AND  PROSPERITY 

very  materially,  when  they  go  to  the  Legislature  to  get 
permission  to  increase  the  rate  of  fare.  It  costs  them 
with  the  present  rate  of  wages  and  the  present  price 
of  coal — that  is,  with  money  at  its  present  purchasing 
power — two  and  a  half  cents  to  carry  the  passenger. 
The  profit  is  two  and  a  half  cents  and  all  the  income  in 
the  way  of  dividends  or  interest  of  all  these  securities 
of  these  two  companies  is  dependent  upon  that  two  and 
a  half  cents  profit.  But  with  labor  at  four  dollars  a  day 
and  coal  at  six  dollars  a  ton — that  is,  with  the  operating 
expenses  doubled — it  would  cost  them  five  cents  to 
carry  the  passengers  and  there  would  be  no  profit. 

At  any  rate,  even  if  the  effect  be  not  in  reality 
quite  so  startling,  the  profit  is  likely  to  grow  beauti- 
fully less  and  the  funds  available  for  interest  and  divi- 
dends to  grow  small,  almost  if  not  quite  to  the  dis- 
appearing point. 

The  moral  is,  don't  buy  for  long  investment  securi- 
ties of  public  service  corporations  where  their  charges 
are  limited  by  law. 

The  same  consideration  applies  to  the  securities 
of  steam  railroads  and  of  all  transportation  companies 
to  a  less  degree.  Their  rates  are  all  either  fixed  or 
limited  by  law  or  are  likely  to  be. 

Of  course,  if  the  profit  should  permanently  dis- 
appear the  community  would  either  have  to  allow 
higher  rates  of  fare  and  freight  or  do  without  the  ser- 
vice or — what  is  much  more  likely — take  over  the 
franchises  themselves  at  the  then  valuation,  which  by 
that  time  would  have  suffered  a  very  material  decrease. 

If  we  could  find  an  instance  where  a  public  service 
corporation  had,  for  example,  built  a  trolley  system, 


THE   DUTY   OF  GOLD  109 

capitalized  their  property  at  cost,  issued  no  bonds  and 
indulged  in  none  of  the  usual  tricks  of  the  trade  in 
the  way  of  holding  companies,  etc.,  the  stockholders 
would  be  in  receipt  of  some  returns,  though  of  a 
diminishing  amount,  down  to  the  time  when  the  cost 
of  operation  equaled  the  returns  from  fares  and 
freight.  But  where  there  is  a  series  of  corporations, 
built  one  upon  the  other,  and  the  real  operating  com- 
pany has  to  pay  interest  and  dividends  on  a  capitali- 
zation several  times  the  real  cost  of  the  property  before 
its  own  bondholders  and  stockholders  begin  to  receive 
any  income  whatever,  then  the  bankruptcy  of  the 
operating  company  is  very  much  nearer.  The  interest 
and  dividends  of  the  holders  of  the  securities  of  the  old 
Sixth  Avenue  and  Eighth  Avenue  horse  railroad  com- 
panies or  the  Brooklyn  City  Railroad  Company  would 
long  survive  the  holders  of  the  securities  of  the  Metro- 
politan Street  Railway  Company  or  the  Brooklyn 
Heights  Railway  Company. 

To  wipe  out  the  equity  of  the  holding  companies 
it  is  not  necessary  to  have  an  increase  of  100%  in  oper- 
ating expenses — an  increase  of  50%  would  be  quite 
sufficient.  It  would  not  be  necessary  to  wait  twenty 
years — ten  or  perhaps  five  years  may  do  the  work. 

Such  astute  investors  as  the  late  Roswell  P. 
Flower  and  the  late  William  C.  Whitney  knew  pretty 
well  what  they  were  doing  when  they  sold  their  trac- 
tion holdings  in  their  lifetimes  and  left  better  things  in 
their  estates. 

So  far  as  this  increase  in  operating  expenses  repre- 
sents an  increase  in  the  rate  of  wages,  whether  the  in- 
crease is  caused  by  increase  in  the  world's  gold  supply 


110  GOLD  SUPPLY  AND  PROSPERITY 

or  otherwise,  all  good  citizens  will  hope  and  pray  for  it 
to  come  and  come  speedily,  whatever  may  be  the  effect 
upon  the  price  or  value  of  marketable  securities.  There 
are  thousands  doubtless  who  receive  dividends  and 
interest  from  such  securities.  There  are  millions  who 
are  affected  by  the  wages  that  are  paid.  The  thousands 
may  suffer.  The  millions  will  profit.  A  nation's  place 
in  civilization  is  really  measured  by  its  wage  rate,  and 
any  force  that  increases  that,  is  doing  God's  holy  work. 

As  for  the  four  dollar  or  five  dollar  or  six  dollar 
wage  rate  for  motormen  and  conductors,  let  us  wel- 
come the  prospect  of  it.  No  matter  what  inconvenience 
it  may  cause  in  Wall  Street  or  on  Murray  Hill,  it  will 
bring  unspeakable  happiness  to  Tenth  Avenue  and  the 
East  Side. 

3.  The  best  security  to  invest  in  for  a  long  in- 
vestment to-day  would  seem  to  be  something  which 
is  based  upon  some  monopoly  of  production,  so  as  to 
avoid  destructive  competition,  and  as  to  which  there 
is  full  and  absolute  ownership,  not  based  upon  any 
public  franchise. 

Actual  property  rights  will  remain  long  after 
franchises  are  wiped  out  either  by  bankruptcy  or  by 
public  absorption. 

Real  estate  of  all  kinds  where  favorably  situated 
so  that  the  investor  gets  full  value  for  his  money, 
comes  within  this  description.  This  includes  the  stocks 
of  honestly  and  intelligently  managed  corporations 
which  have  real  estate  as  their  assets.  Mines  are  real 
estate  as  well  as  building  lots,  and  there  is  no  better 
investment  to-day  than  in  the  securities  of  mining 
companies — other   than   those   which   are   mining   for 


THE  DUTY   OF  GOLD  111 

gold  alone — moderately  and  fairly  capitalized  and  well 
managed.  All  industrials  are  good  investments  where 
there  is  some  effective  security  against  destructive 
competition  and  where  there  is  an  assurance  of  the 
continuance  of  good  management.  A  manufacturing 
enterprise  with  a  specially  favorable  location  so  that  it 
has  the  advantage  of  water  power  or  nearness  to  the 
markets  for  raw  materials  and  manufactured  products 
and  is  not  of  such  a  nature  as  to  be  liable  to  govern- 
ment regulation,  cannot  but  be  good  if  properly  man- 
aged. Nothing  could  be  better  than  a  railroad  if  it 
could  be  assured  of  being  allowed  to  charge,  and  of 
being  able  to  charge,  remunerative  rates,  for  traffic  of 
all  kinds  will  certainly  increase. 

It  is  not  my  purpose  to  malce  an  enumeration  of 
all  good  or  all  bad  investments.  I  simply  state  some 
that  are  surely  good  and  some  that  are  surely  bad  as 
illustrations.  My  object  is  simply  to  furnish  tests 
which  can  be  applied  to  each  investment  as  it  comes 
up.    If  I  am  right  in  my  reasoning  the  tests  are : 

1.  How  will  it  be  affected,  directly  or  indirectly, 
by  the  increase  in  the  gold  supply  of  the  world  that  is 
going  on  so  fast,  and 

2.  Is  is  honestly  and  intelligently  managed?  If 
not  it  can  have  no  possible  merit  that  will  compensate 
for  this  fatal  defeci. 


FRANK  A.  VANDERLIP 

Vice-President     National     City     Bank 


Influx  of  Gold  Means  Prosperity 

By  Frank  A.  \'anderlh* 

]V/TR.  FRANK  A.  VANDERLIP,  Vice-President  of 
'^^'*-  the  National  City  Bank  of  New  York  City, 
devoted  a  large  part  of  his  address  to  the  American 
Bankers'  Association  in  Washington,  on  October  11, 
1905,  to  the  subject  of  the  increasing  output  of  gold. 
As  but  few,  if  any,  of  the  newspapers  printed  this  most 
interesting  part  of  his  address  in  full,  it  is  here  re- 
printed.   It  is  as  follows : 

The  world  has  withstood  the  financial  strain  of  a 
war  which  cost  the  combatant  nations  two  billion 
dollars.  It  has  withstood  that  strain  so  easily  that  one 
is  led  to  inquire  how  it  has  been  possible  that  such  a 
disaster  should  have  produced  no  more  unfortunate 
results.  I  believe  the  answer  to  that  should  be  looked 
for  in  a  quarter  to  which  our  academic  friends  have 
been  giving  some  attention,  but  which  has  not  as  yet 
come  to  exercise  very  great  interest  among  practical 
financiers.  It  is  not  alone  to  the  raisers  of  grain  that 
Nature  has  been  bountiful  of  late.  The  mines  of  the 
world  have  been  yielding  treasure  as  lavishly  as  have 
our  fields.  In  every  day  of  this  year,  nineteen  hundred 
and  five,  work  days  and  feast  days,  holidays  and  Sun- 
days, there  will  be  drawn  from  the  ground  a  million 
dollars  of  new  gold.  And  then  when  the  total  is  finally 
cast  up  there  will  be  a  number  of  odd  millions  to  spare 

113 


114  GOLD  SUPPLY  AND  PROSPERITY 

above  that  average.  The  mines  of  the  world  will  pro- 
duce this  year  $375,000,000  of  gold.  The  final  figures 
for  the  production  of  gold  in  1904  have  recently  been 
made  and  they  footed  $347,000,000.  We  may  reason- 
ably look  forward  in  the  near  future  to  an  annual  out- 
put of  $400,000,000  of  new  gold  for  at  least  a  consider- 
able number  of  years.  When  we  remember  that  in 
1885  the  production  of  gold  was  but  $115,000,000; 
when  we  remember,  further,  that  the  entire  monetary 
stock  of  gold  in  the  world  is  about  $5,700,000,000,  we 
can  calculate  that  the  output  from  the  mines,  in  the 
next  fourteen  years  promises  to  equal  a  total  as  great 
as  the  present  monetary  stock  of  gold.  These  figures 
are  startling.  They  perhaps  suggest  the  possibility  of 
a  disturbance  of  values.  It  does  not  follow,  of  course, 
that  with  the  production  of  $400,000,000  of  gold  per 
annum  the  monetary  stocks  will  be  increased  by  that 
amount.  The  uses  of  gold  in  the  domestic  arts  draw 
off  at  least  $75,000,000  a  year,  but  that  will  leave  over 
$300,000,000  a  year  to  add  to  the  gold  reserves.  So 
eminent  an  economist  as  Le  Roy  Beaulieu  has  esti- 
mated that  the  monetary  stocks  of  the  world  will  be 
doubled  in  twenty-five  years.  In  the  light  of  recent 
statistics  of  the  output  of  production  I  have  no  doubt 
he  would  modify  that  estimate  and  incline  to  the  view 
that  the  monetary  stocks  will  be  doubled  in  twenty 
years. 

THE  INFLUENCE  UPON  PRICES 

What  is  this  to  mean  to  the  business  situation? 
What  is  to  be  its  influence  upon  prices?  What  effect 
will  it  have  upon  money  rates?     These  are  no  longer 


INFLUX    OF    GOLD    MEANS    PROSPERITY     115 

academic  questions.  They  are  practical  considerations 
which  need  to  be  taken  into  account  by  business  men. 
The  great  increase  in  gold  production  which  has  been 
in  progress  since  the  close  of  the  Boer  War  has,  in  my 
opinion,  been  a  factor  in  the  rapid  recovery  from  the 
depression  of  three  years  ago.  At  that  time,  through 
financial  excesses  and  indiscretions,  we  had  been  led 
into  a  dangerous  position.  In  Europe  also  the  chilling 
effect  of  the  great  destruction  of  capital  occasioned  by 
that  war,  was  everywhere  manifest.  This  new  gold 
production  pouring  itself  into  the  bank  reserves  of  the 
world  has  been  an  influence  in  bringing  about  the 
quick  recovery  from  depression  and  in  withstanding 
the  shock  of  the  future  destruction  of  capital  which  the 
Russo-Japanese  War  entailed. 

CLASSICAL  ECONOMISTS  AND  W^HAT  THEY  SAY 

The  classical  economists,  Ricardo,  Adam  Smith  and 
Mill,  evolved  the  quantity  theory  of  money.  They 
held  that  the  prices  of  things  would  vary  with  the 
quantity  of  money  in  existence.  If  the  money  stock 
were  doubled,  prices  would  be  doubled ;  if  the  money 
stocks  were  halved  prices  would  be  cut  in  two.  That 
theory  has  been  proved  to  be  inadequate.  There  are 
many  other  interfering  circumstances  and  modifying 
conditions.  Nevertheless  there  is  economic  truth  and 
force  in  it.  It  is  within  the  intimate  knowledge  of  all 
of  us  that  if  our  bank  reserves  are  increased  we  are 
moved  to  increase  our  loans.  A  pressure  to  increase 
loans  tends  to  reduce  interest  rates.  Lower  interest 
rates  enhance  the  price  of  income-paying  securities.  I 
think  everyone  will  accept,  subject  to  important  modi- 


116  GOLD  SUPPLY  AND  PROSPERITY 

fying  conditions,  the  statement  that  an  increase  in  the 
monetary  supply  has  a  tendency  to  advance  prices. 
There  may  be  other  influences  that  will  counteract  in 
the  final  result.  There  can  be  no  doubt,  however,  that 
with  every  million  dollars  of  gold  added  to  the  bank 
reserves  of  the  world,  there  is  a  disposition  to  increase 
credit  lines.  That  increase  in  credit  lines  in  turn  has 
its  influence  on  the  side  of  advancing  prices.  As  a 
practical  matter,  however,  I  do  not  believe  we  are 
facing  any  economic  revolution  as  a  result  of  this  in- 
flux of  gold.  We  must  remember  that  the  growth  of 
business  may  keep  pace  or  even  run  ahead  of  the  sub- 
stantial growth  in  the  gold  reserve,  so  that  in  spite  of 
actual  increase  the  relative  percentage  of  gold  reserves 
to  credit  demand  would  leave  prices  unchanged. 

The  subject  is  a  fascinating  one,  but  at  the  outset  it 
must  be  admitted  that  it  is  not  one  for  accurate  calcu- 
lation and  definite  conclusion.  There  are  a  few  consid- 
erations, however,  and  some  popular  misapprehensions 
in  regard  to  it  concerning  which  it  would  be  well  to 
have  clear  thinking.  For  example,  it  is  rather  com- 
monly said  a  great  increase  in  the  gold  supply  will 
bring  us  to  a  permanently  lower  interest  basis.  That 
is  a  misconception.  It  is  true  that  the  first  effect  of 
gold  additions  to  a  bank  reserve  will  be  to  lower  the 
interest  rate.  That  effect,  however,  is  temporary. 
When  the  money  supply  has  reached  a  permanent 
level,  no  matter  how  great  the  increase  in  it  has  been, 
the  interest  rate,  other  things  remaining  unchanged, 
will  find  its  regular  level.  Interest  is  but  a  payment  in 
kind.  If  the  value  of  money  depreciates,  the  value  of 
interest  payment  depreciates  as  well.     We  need  look 


INFLUX  OF  GOLD  MEANS   PROSPERITY       117 

for  no  permanently  lower  interest  basis  as  a  result  of 
an  increase  in  the  money  stock,  but  while  that  increase 
is  in  progress,  the  reserves  are  being  constantly  aug- 
mented and  the  tendency  would  be  toward  lower  rates. 

There  is  another  consideration  which  we  should 
have  clearly  in  mind.  Disregarding  for  the  moment 
all  other  influences,  we  may  lay  down  the  principle 
that  an  increase  in  the  supply  of  money  will  tend  to 
advance  the  price  of  real  property,  but  the  price  of  an 
obligation  repayable  in  money  will  not  tend  to  ad- 
vance. That  is  to  say,  that  real  estate  and  all  forms 
of  property,  including  shares  of  corporate  stock,  which 
represent  an  ownership  in  real  property,  would  ad- 
vance, but  bonds,  which  represent  only  the  right  to 
demand  a  payment  in  money,  would  not  advance.  All 
persons  having  a  fixed  income  would  find  the  purchas- 
ing power  of  that  income  reduced.  The  return  from 
mortgages  and  bonds  would  have  a  reduced  purchas- 
ing power.  Persons  receiving  fixed  salaries  and  wage 
earners  generally  would  be  at  a  disadvantage,  for  their 
incomes  would  not  tend  to  increase  as  rapidly  as  the 
purchasing  power  of  their  wages  decreased.  Under 
such  a  set  of  circumstances,  there  would  be  constant 
pressure  from  wage  earners  in  order  to  increase  their 
incomes  so  as  to  keep  pace  with  the  advanced  cost  of 
living.  Is  not  that  exactly  what  we  have  been  seeing, 
and  are  we  not  likely  to  see  more  of  that  same  pressure 
to  advance  wages  as  the  cost  of  living  advances? 

These  are  tendencies  which  would  become  sharply 
manifest  if  there  were  not  counteracting  influences 
opposing  them.  That  there  are  sure  to  be  such  coun- 
teracting influences  goes  without  saying.     I  recall  a 


118  GOLD  SUPPLY  AND  PROSPERITY 

conversation  which  I  once  had  with  the  great  German 
financier,  Von  Siemens,  the  creator  of  the  Deutsche 
Bank.  The  balances  of  trade  in  our  favor  had  been 
cHmbing  up  from  $400,000,000  to  $500,000,000  and  then 
had  gone  well  beyond  $600,000,000,  and  it  looked  as  if 
we  might  drain  Europe  of  her  whole  monetary  stock 
if  that  sort  of  thing  was  to  go  on.  I  asked  Herr  von 
Siemens  what  was  to  be  the  outcome  for  Europe.  He 
replied  with  a  well  known  German  phrase,  "A  tree 
never  quite  grows  to  heaven."  Events  soon  proved 
that  this  tree  of  favorable  trade  balances  could  not 
quite  grow  to  heaven,  although  for  the  moment  it  did 
look  as  though  it  were  likely  to.  And  so  with  this 
increased  production  of  gold  which  gives  promise  of 
doubling  the  monetary  stock  of  the  world  in  the  next 
score  of  years.  We  might  expect,  if  the  theories  of  the 
classical  economists  held  good,  that  with  a  doubling 
of  the  gold  stock  would  come  a  doubling  of  prices. 
We  can,  however,  be  very  certain  that  the  theory  will 
not  entirely  hold  good.  There  will  be  counteracting 
influences.  While  there  will  undoubtedly  be  a  ten- 
dency to  advance  prices  as  a  result  of  this  influx  of  gold 
into  the  bank  reserves  of  the  world,  I  do  not  believe 
the  gold  production  is  likely  to  become  a  serious  men- 
ace. I  do  not  believe  that  it  will  so  disturb  those  busi- 
ness relations  that  are  based  upon  the  terms  of  money, 
as  to  cause  any  vital  derangement  of  affairs. 

OUR  COMMERCIAL  A'WAKENING 

What  I  do  believe  is  that  there  is  likely  to  follow 
just  what  followed  in  the  two  former  periods  of  the 


INFLUX   OF   GOLD   MEANS  PROSPERITY       119 

world's  history  when  there  was  an  extraordinary  pro- 
duction of  gold  added  to  the  monetary  stocks.  One  of 
these  periods  followed  the  discovery  of  America,  when 
the  treasures  of  Mexico  and  Peru  were  exploited. 
The  other  was  in  the  years  following  the  discovery  of 
gold  in  California  and  Australia.  In  each  case  a 
mighty  impulse  was  given  to  the  exploitation  of  virgin 
fields  of  development.  It  seems  to  me  not  improbable 
that  the  next  few  years  will  witness  the  expansion  of 
the  field  of  commercial  enterprise  into  new  places. 
Countries  that  are  commercially  and  industrially  back- 
ward will  yield  to  this  new  influence.  It  seems  to  me 
that  one  of  the  direct  and  important  effects  of  this 
great  production  of  gold  will  be  to  give  an  impulse  to 
the  development  and  industrial  exploitation  of  South 
America,  Africa,  Asia  and  eastern  Europe.  At  our 
own  hand  is  South  America  on  one  side,  and  China  and 
Japan  on  the  other.  We  are  rapidly  awakening  to  the 
commercial  possibilities  within  these  countries.  If  we 
are  to  have  an  influx  of  gold  more  than  ample  to  sus- 
tain the  credit-operations  for  our  domestic  affairs,  that 
fact  will  tend  to  lead  our  interests  into  these  new  fields 
of  exploitation.  Then,  in  turn,  a  wider  use  of  credit 
which  these  new  fields  will  develop  and  the  increased 
reserves  which  that  wider  use  of  credit  will  make 
necessary,  will  probably  absorb  the  increasing  gold 
stock  in  beneficent  uses,  preventing  it  from  ever  be- 
coming a  serious  menace  to  business  organization. 


IRVING  FISHER 

Professor  of  Political  Economy,  Yale  University 


Gold  Production  and  the  Rate  of  Interest 

By  Professor  Irving  Fisher 

'"T^HERE  is  undoubtedly,  at  the  present  time,  an  out- 
look for  an  increasing  supply  of  gold.  There 
does  not  seem  to  be  any  impending  check  to  the  ten- 
dency for  gold  to  depreciate,  unless  it  be  found  in  the 
increasing  demand  for  a  medium  of  exchange  in  conse- 
quence of  the  continued  expansion  of  business  trans- 
actions. That  there  exists  at  present  a  tendency  for 
prices  to  rise  is  evident  from  the  statistics  of  index 
numbers,  both  in  this  country  and  in  Europe.  While 
the  present  increase  of  prices  may  not  continue  at  so 
rapid  a  rate,  and  may  even  receive  occasional  setbacks, 
it  does  not  seem  improbable  that  the  next  generation 
will  see,  on  the  whole,  a  steady  and  gradual  upward 
movement.  It  therefore  becomes  a  question  of  consid- 
erable importance  what  will  be  the  economic  effects  of 
such  a  prolonged  rise  in  prices  as  may  be  expected. 

Among  the  important  effects  of  the  change  will 
be  its  influence  upon  the  rate  of  interest.  It  is  a  great 
but  common  error  to  suppose  that  an  increase  in  the 
supply  of  gold,  and  consequent  expansion  of  prices, 
will  result  in  a  lowering  in  the  rate  of  interest.  This 
error  has  been  repeatedly  exposed  by  economists  from 
the  time  of  Locke  to  the  present,  yet  it  is  unquestion- 
ably only  too  common  today,  especially  among  busi- 
ness men,  who  should  be  the  first  to  realize  practically 

121 


122  GOLD  SUPPLY  AND  PROSPERITY 

the  connection  between  the  monetary  changes  and  the 
interest  rate.  They  reason  that  an  increased  produc- 
tion of  gold  will  increase  the  supply  of  gold  which  is 
available  for  loans.  While  this  is  undoubtedly  true, 
the  effect  is  ultimately  neutralized  by  a  corresponding 
increase  in  the  demand  for  loans.  A  merchant,  for  in- 
stance, who  borrows  in  order  to  lay  in  a  stock  of 
goods,  when  he  finds  that  this  stock  costs  him  more 
than  before  prices  rose,  will  proceed  to  borrow  more 
than  before.  The  effect,  therefore,  of  increasing  prices 
will  be  to  stimulate  the  demand  for  loans  quite  as 
much  as  the  supply. 

Moreover,  if  it  were  true  that  an  increased  supply 
of  money  lowered  the  rate  of  interest,  we  should  find 
that  high  prices  in  actual  fact,  as  shown  by  statistics, 
were  associated  with  low  rates  of  interest,  and  vice 
versa.  But  a  careful  study  of  the  facts,  taken  over  any 
considerable  period  of  time,  will  fail  to  reveal  any  such 
relation.  The  present  writer,  in  making  an  investiga- 
tion in  regard  to  the  rate  of  interest,  found  that  the 
rates  of  interest  in  seven  different  countries  examined 
were  on  the  whole  higher  when  prices  were  high  than 
when  they  were  low.  The  results  are  summarized  in 
the  following  table,  in  which  the  years  of  each  decade 
are  classified  as  years  of  high  and  of  low  prices  accord- 
ing as  they  stand  above  or  below  the  average  price 
level  for  the  decade. 


GOLD  PRODUCTION  AND  RATE  OF  INTEREST  123 

MARKET   RATES    OF   INTEREST   IN   RELATION   TO 
HIGH    AND    LOW    PRICES.* 


1824   1  1832  1  1842  |  1852   1  1862      1872      1882 

to    1     to          to     1     to     1     to     i     to     1    to 
1831   j   1841      1851   1  1861      1871   [   1881   [  1891 
incl.   1  incl.   |  incl.   |  incl,   |  incl.   |  incl,   |  incl. 

London,  High  prices..    3.8  1  4.4      3.6  '  5.4  '  5.1  i  3.7.     3.0 
London,    Low   prices..    3.2!  3.2      2.6i3.0|2.6|2.5      2.5 

New  York,  High  prices    —    |    —       —    1  9.1 
New  York,  Low  prices    —    |    —       —    1  9.1 

7.4     7.0 
6.7     5.1 

5.3 
5.1 

Berlin,    High   prices.. 
Berlin,  Low  prices.  .  . 

—  —    1    —    1    —      4.6      3.7 

—  —    i    —    1    _      3.4      3.2 

3.3 
2.7 

Paris    High    prices... 
Paris,  Low  prices. .  .  . 

1           1                   ,    1    .  ...    1  >|   1 

2.6 
2.6 

i             i             '             1     ....    1   2  ^ 

1             I             1             1             1   *••  * 

Calcutta,    High   prices 
-Calcutta,  Low  prices 

■1    _ ..    '             1             i    .._    i   fi  ? 

5.4 
6.2 

1           I           1           1           !  5  6 

Tokyo,   High  prices.  . 
"Tokyo,  Low  prices.. 

1     ...            .    '            1        ■     1'*  3 

10.1 
10.1 

6.0 
5.7 

1                   '          i     , .   11?  n 

Shanghai,    High    price; 
^Shanghai,   Low   prices 

1             .  .          .   1    .  .   1   , 

Of  the  21  comparisons  contained  in  this  table,  17 
show  higher  rates  for  high-price  years  than  for  low- 
price  years,  one  shows  the  opposite  condition  and  three 
show  equal  rates  in  the  two  cases.  As  the  table  cov- 
ers 68  years  for  London,  40  for  New  York,  30  for  Ber- 
lin, 20  for  Paris,  19  each  for  Calcutta  and  Tokyo,  and  9 


*For  New  York,  the  rates  for  the  first  decade  are  averaged. 

The  index  numbers  of  prices  which  have  been  employed  are  those 
of  Jevons  (1824-51)  and  Sauerbeck  (1852-91)  for  England,  Soetbeer  and 
Heinz  for  Germany,  the  Aldrich  Senate  report  for  the  United  States 
and  France,  and  the  Japanese  report  for  India,  Japan  and  China.  The 
table  ends  in  1891  because  there  are  no  index  numbers  for  the  United 
states  since  that  year. 

2.  For  Calcutta  the  rate  for  the  bank  of  Bengal  is  employed,  no 
"market"  rate  being'  available.  The  first  column  is  for  1873-81  instead 
of  1872-81,  for  the  reason  that  no  index  number  for  1872  is  available. 

3.  For  Tokyo  the  first  column  is  for  1873-81  for  the  same  reason. 

4.  For  Shanghai  the  period  is  1885-93  instead  of  1882-91,  for  the 
reason  that  the  available  rates  begin  in  1885  and  the  index  numbers 
end  in  1893. 


124  GOLD  SUPPLY  AND  PROSPERITY 

for  Shanghai,  or  205  years  in  the  aggregate,  the  result 
may  be  accepted  with  great  confidence.  It  shows  that 
instead  of  times  of  high  prices  being  times  of  low  in- 
terest, the  reverse  is  rather  the  case,  We  need  not 
stop  here  to  ask  why  this  is  so.  It  suffices  to  point  out 
that  the  statistics  lend  no  countenance  to  the  prevail- 
ing view  that  plentiful  money  means  low  interest. 
Leaving,  therefore,  this  error,  we  proceed  to  the  main 
topic  of  the  present  paper,  which  is  the  study  of  the 
effect  of  steadily  depreciating  currency  upon  the  rate 
of  interest. 

We  have  reference,  not  to  depreciated  currency, 
but  to  depreciating  currency;  that  is,  not  to  the  ques- 
tion of  what  the  rate  of  interest  will  be  after  the 
present  upward  price  movement  ceases  and  a  new  sta- 
tionary level  is  reached,  but  what  is  the  effect  during 
the  long  interim  while  prices  are  in  process  of  rising. 

The  effect  of  depreciating  currency  upon  the  rate 
of  interest  will  depend  upon  the  extent  to  which  that 
depreciation  is  or  is  not  foreknown.  If  we  could  sup- 
pose that  the  depreciation  of  money  or  increase  of 
price  occurred  entirely  unforeseen,  the  result  would  be 
that  the  rate  of  interest  would  remain  relatively  unaf- 
fected. In  consequence  of  this,  as  has  often  been 
pointed  out,  the  creditor  would  lose  on  account  of  the 
depreciation  of  the  principal.  He  would  be  repaid  in  a 
standard  of  less  value  than  that  which  he  anticipated 
when  he  contracted  the  loan.  In  the  same  way  the 
debtor  would  gain.  Rising  prices  or  depreciating  cur- 
rency would  therefore  mean  in  this  case  a  decrease  of 
the  burden  of  debts  and  an  unintended   transfer  of 


GOLD  PRODUCTION  AND  RATE  OF  INTEREST  125 

wealth  from  debtor  to  creditor.  Other  cognate  effects 
on  loans  and  enterprise  have  often  been  noted. 

On  the  other  hand,  could  it  be  assumed  that  the 
general  upward  trend  of  prices  were  definitely  known 
in  advance,  the  rates  of  interest  would  be  high  through- 
out this  rising  period ;  for  a  creditor  who  kriew  that  he 
would  be  repaid  a  depreciated  principal  would  attempt 
to  recoup  himself  in  advance  by  an  increase  in  the  rate 
of  interest.'"' 

It  would  not  be  necessary  that  this  should  be  con- 
sciously thought  of  by  him  as  an  effort  to  offset  the 
depreciation  in  the  currency.  Thinking,  as  he  always 
does,  in  terms  of  money,  he  would  simply  see  that  in 
consequence  of  a  prospective  increase  in  prices,  money 
dividends  will  increase  and  there  will  be  better  oppor- 
tunities for  him  as  an  investor  to  make  money  from 
stocks  than  from  bonds,  unless  the  latter  can  be  ob- 
tained on  such  terms  as  to  compensate  for  this  advan- 
tage. But  in  whatever  aspect  the  matter  appears  in  his 
eyes,  the  effect  on  the  rate  of  interest  is  in  essence  an 
increase  such  as  to  offset  the  prospective  depreciation 


*For  a  mathematical  statement  of  this  relation  see  the  writer's 
"Appreciation  and  Interest,"  (Puhlications  of  the  American  Statistical 
Association,  1896.)  The  connection  between  interest  and  appreciation 
was  recognized  by  the  anonymous  author  of  a  remarkable  pamphlet 
entitled  "A  discourse  Concerning-  the  Currencies  of  the  British  Planta- 
tions in  America,"  Boston,  1740  (reprinted  in  the  Overstone  Tracts, 
1857)  ;  also  by  John  Stuart  Mill,  in  Bools  III,  Ch.  23,  Sec.  4,  of  his 
Principles  of  Political  Economy;  by  Jacob  de  Haas,  in  a  paper  called 
"A  Third  Element  in  the  Rate  of  Interest,"  published  in  the  Journal 
of  the  Royal  Statistical  Society,  March,  1889 ;  and  by  Professor  John  B. 
Clark  in  "The  Gold  Standard  in  the  Light  of  Recent  Theory,"  Political 
Science  Quarterly,  September,  1895,  More  recent  recognition  of  the 
principle  is  found  in  Byron  W.  Holt's  "Interest  and  Appreciation," 
Sound  Currency  Pamphlets,  Vol.  5,  No.  22,  1898,  and  by  Professor  Alfred 
Marshall  in  his  parliamentary  testimony  published  in  the  Indian  Cur- 
rency Report,  1899,  Pt.  2,  p.  169. 


126  GOLD  SUPPLY  AND  PROSPERITY 

in  principal.  In  other  words,  a  business  man  who  fore- 
sees that  the  monetary  standard  is  changing  will  take 
measures  to  safeguard  himself,  just  as  would  contract- 
ing parties  if  they  knew  that  the  standards  of  weights 
and  measures  were  about  to  be  changed. 

One  of  the  best  instances  of  the  influence  of  a 
prospective  change  in  the  monetary  standard  upon  the 
rate  of  interest  is  afforded  by  the  action  of  a  syndicate, 
which  after  the  panic  of  1893  offered  two  alternative 
loan  contracts  to  the  United  States  government.  One, 
in  which  the  gold  standard  was  specified,  was  offered 
on  a  3%  basis,  and  the  other,  in  which  the  standard 
was  to  be  "coin,"  which  might  mean  silver  of  less  value 
than  gold,  was  offered  on  a  33/^9^  basis.  The  present 
writer,  in  a  paper  published  by  the  American  Eco- 
nomic Association  in  1896,  showed  that  there  was 
much  statistical  evidence  that  changes  in  the  mone- 
tary standard  were  foreseen  and  forestalled  by  the  ad- 
justment of  interest  rates.  It  is  his  intention  soon  to 
publish  further  verification  in  a  book  on  "Capital  and 
Income." 

Among  the  items  of  evidence  may  be  mentioned 
the  following:  First,  where  it  happens  that  two  differ- 
ent standards  in  the  same  market  are  used,  the  rates  of 
interest  realized  to  investors  in  the  two  cases  differ 
in  accordance  with  the  expected  relative  changes  in  the 
two  standards.  For  instance,  in  the  United  States  be- 
fore the  period  of  resumption  of  specie  payments,  there 
were  two  sets  of  bonds,  one  payable  in  coin  (gold)  and 
the  other  in  "currency."  It  was  found  that  from  1870 
to  1878,  the  date  of  resumption,  during  which  th"e  cur- 
rency standard  gradually  rose  toward  the  gold  stand- 


GOLD  PRODUCTION  AND  RATE  OF  INTEREST  127 

ard,  the  rates  of  interest  realized  to  the  investor  in  the 
"currency"  bonds  were  actually  less  than  for  the  coin 
bonds.  This  effect  was  particularly  noticeable  after 
the  passage  of  the  Resumption  Act,  when  the  elevation 
of  the  "currency"  standard  to  the  gold  standard  was 
assured. 

Perhaps  the  most  interesting  case  of  two  bonds  of 
different  standards  is  afforded  by  the  government  of 
India,  which  has  for  years  m.aintained  a  double  form  of 
funded  debt,  one  in  pounds  sterling  and  the  other  in 
rupees.  Before  the  rupture  of  the  world's  bimetallic 
ties,  which  occurred  about  1873,  gold  and  silver  re- 
mained almost  exactly  on  an  equality  at  the  ratio  of 
155^  to  1.  Consequently,  up  to  this  point,  the  value  of 
the  rupee  remained  close  to  23  pence.  But  as  soon  as 
bimetallism  was  broken  down  through  the  increase  in 
the  production  of  silver  and  the  consequent  demoneti- 
zation by  France  and  other  countries,  the  rupee  stead- 
ily declined  in  value  until  1893,  when  the  Indian  mints 
were  closed  to  silver  and  the  rupee  was  given  an  artifi- 
cial value  midway  between  gold  and  silver.  In  fact, 
the  rupee  continued  to  decline  for  two  years  more,  in 
consequence  probably  of  the  existence  of  coin  hoards 
which  were  gradually  turned  into  the  circulation.  But 
after  1895  the  rupee  began  to  rally  in  consequence  of 
the  scarcity  value  given  to  it  by  the  action  of  the  In- 
dian government,  until,  in  1898,  it  had  reached  the 
legal  level  of  16  pence,  at  which  it  has  remained  ever 
since.  We  therefore  see  that  there  were  four  different 
periods,  showing  four  different  relations  between  the 
gold  and  the  rupee  standard:  (1)  a  period  of  high  and 
stationary   value   of   the   rupee,   prior   to    1875;    (2)    a 


128 


GOLD  SUPPLY  AND  PROSPERITY 


period  in  which  the  rupee  fell  with  reference  to  gold, 
from  1874  to  1895;  (3)  the  period  of  the  partial  recov- 
ery in  the  value  of  the  rupee,  from  1896  to  1898;  and 
(4)  the  period  from  1898  to  the  present,  during  which 
the  rupee  has  remained  at  its  newly-found  level.  We 
find  that  the  rates  of  interest  realized  (to  maturity)  by 
the  investor  in  these  two  securities,  reckoned  at  par 
during  these  four  periods,  were  as  follows: 


Average 

Standard 

' 

-^ 

Rate  of 

Gold 

Gold  Value 

Interest  in 

interest  in 

Difference 

of 

Rupee 

Rate  of 

Rupee 

Standard 

Average 

1865-1874 

incl.  . 

...   4.1 

3.9 

1          -2 

1     constant 

1874-1895 

incl.  . 

. ..    4.0 

3.3 

.7 

falling 

1896-1899 

incl . . 

...    3.5 

3.1 

.4 

rising 

1900-1905 

incl . . 

...    3.6 

3.5 

1           1 

constant 

We  observe  here  that  during  the  first  period,  while 
the  gold  value  of  the  rupee  kept  constant,  the  two 
securities  yielded  nearly  equal  rates  of  return;  during 
the  second  period,  when  the  price  of  the  rupee  was  fall- 
ing, the  rate  of  interest  realized  to  the  investor  in  the 
rupee  security  was  much  higher;  in  the  third  period, 
when  the  rupee  was  rising,  this  disparity  began  to  dis- 
appear and  in  the  fourth  period,  when  the  rupee  was 
once  more  stable,  the  two  securities  sell  again  on  the 
same  basis.  The  fact  that  in  the  third  period  the  rate 
on  rupee  paper  was  not  actually  lower  than  on  gold 
security  was  due  to  the  lack  of  confidence  that  the 
closure  of  the  mints  would  prove  efficient  in  elevating 
the  value  of  the  rupee. 

Further  and  more  direct  evidence  is  found  in  the 
fact  that  periods  of  rising  prices  are  actually  periods 


GOLD  PRODUCTION  AND  RATE  OF  INTEREST  129 


of  high  interest,  and  periods  of  falling  prices  are 
periods  of  low  interest.  This  was  found  by  the  writer 
to  be  true  in  57  cases  out  of  73,  distributed  as  in  the 
table  below.  In  the  remaining  16  cases  the  relation  did 
not  hold  true ;  that  is,  interest  was  low  in  spite  of  rising 
prices,  or  high  in  spite  of  falling  prices : 


Cases   in   which       i  Eng-       Ger-     j.           lUnited    j^^       j 
interest    is               land      many  |              j  States    ■'"""*     uaiiau 

China 

1 
high  or  low  as    j 
prices    rise       ;      21 
or   fall          i 

J 

12 

8 

3 

4 

1 

8 

high  or  low  as  1 
prices    fall       V      5 
or  rise          J 

3 

2 

2 

1 

2             1 

But,  while  the  evidence  shows  that  the  prospective 
changes  in  the  monetary  standard  are  dimly  foreseen 
and  partially  forestalled,  the  foresight  thus  displayed 
is  extremely  imperfect.  There  are  relatively  few  who 
really  foresee  the  rise  and  fall  in  prices,  and  those  who 
do  are  possibly  sometimes  misled  in  their  action  in 
consequence  of  the  prevailing  prejudice  that  an  in- 
creased money  supply  must  lower  interest  rates,  and 
vice  versa.  When  we  come,  therefore,  to  consider  the 
extent  to  which  actually  the  market  safeguards  itself 
against  changes  in  the  monetary  standard,  we  find  that 
it  usually  underestimates  the  prospective  change, 
whether  it  be  one  of  appreciation  or  depreciation.  In 
an  attempt  to  estimate  the  effect  of  the  falling  prices, 
or  appreciation  of  the  monetary  standard  in  terms  of 
commodities  during  the  period  of  1873  to  1895,  it  was 
concluded  that  the  offset  to  this  appreciation  through 


130  GOLD  SUPPLY  AND  PROSPERITY 

a  decrease  in  the  rate  of  interest  was  less  than  half 
what  it  should  have  been  in  order  to  be  complete.  We 
may  with  considerable  confidence  predict  that  should 
the  ensuing  generation  see  a  gradual  depreciation  in 
the  monetary  standard,  the  r^te  of  interest  will  remain 
fairly  high,  but  not  high  enough  to  compensate  for  the 
annual  fall  in  the  monetary  standard.  Thus,  though 
the  rate  of  interest  will  be  apparently  high,  it  will,  in 
its  burden  upon  the  debtor,  be  actually  low,  and  the 
creditor  will,  therefore,  lose  to  some  extent.  Should 
this  be  true,  it  will  also  be  found  that  in  general  those 
who  have  invested  in  stocks  will  be  better  off  than 
those  who  have  invested  in  bonds,  for  the  stock  in- 
vestor represents,  in  these  relations,  the  debtor,  and 
the  bond  investor,  the  creditor. 

All  these  calculations,  however,  are  based  on  the 
assumption  that  prices  will  actually  rise  through  a 
long  period  of  time.  Economic  predictions  are  ex- 
tremely hazardous,  and  the  present  writer  disclaims 
having  made  a  sufficient  study  of  prospective  mone- 
tary conditions  upon  which  to  base  any  sure  prophecy. 


ELLIS  H.  ROBERTS 

Ex-Treasurer   of  [the    United   States 


Over  Supply  of  Gold  Unlikely 

By  Ellis  H.  Roberts 

TF  the  current  of  $350,000,000  of  new  gold  were  to 
flow  every  year  into  a  field  where  everything  was 
in  equilibrium,  the  problem  of  determining  the  facts 
would  be  simple.  But  the  increase  in  the  supply  of 
gold  is  only  one,  however  great,  of  many  factors,  at 
work  in  the  world  of  business.  The  wants  of  man 
grow  always  in  scope,  variety,  extent,  for  body  and 
mind,  for  style,  for  fashion,  for  display,  for  luxury,  for 
art.  for  culture,  for  diversion  and  amusement,  for  edu- 
cation, for  charity,  for  religion.  Statistics  may  in  a 
way  record  the  flow  of  gold  and  the  trend  of  prices 
and  wages,  of  rent  and  interest.  What  rule  shall  meas- 
ure, what  scales  shall  weigh  the  wants  of  the  human 
race,  mysterious  as  well  as  potent?  All  other  condi- 
tions follow  and  are  in  large  degree  created  by  them. 

How  the  demand  for  new  methods  and  greater 
facility  and  rapidity  of  locomotion  and  transportation 
calls  for  additions  to  capital  and  currency!  The  sav- 
age must  go  afoot  until  his  needs  devise  a  skiff  and  the 
horse  comes  to  help  him;  then  he  invents  a  wagon. 
His  trail  is  broadened  to  a  road;  postriders  and  stages 
respond  to  trade.  Railroads,  steamboats  hurry  in 
course.  Great  systems  are  built  up.  Travel  becomes 
a  fashion,  a  rage.    The  errand-boy  has  his  bicycle ;  the 

133 


134  GOLD  SUPPLY  AND  PROSPERITY 

automobile  serves  traffic  and  pleasure.  Popular  excur- 
sions carry  myriads  of  men,  women  and  children  over 
thousands  of  miles,  across  continents,  from  sea  to  sea. 
Trips  around  the  world  take  the  romance  from  Sir 
John  Mandeville  and  Marco  Polo  and  turn  Herodotus 
into  commonplace.  Men  write  and  talk  by  wire,  or 
even  without  wires,  over  vast  distances  more  freely 
than  by  the  slow  mails  of  olden  days.  The  Greek  run- 
ner who  fetched  the  news  of  the  victory  of  Marathon 
to  Athens,  had  less  than  the  speed  of  a  snail  in  com- 
parison. 

All  this  costs  money  in  vast  sums  increasing  in 
geometric  ratio.  Railroads  must  be  laid,  must  be  im- 
proved, must  be  extended.  Heavier  rails  are  required. 
Locomotives  must  be  many,  more  and  more,  and  ever 
greater  in  power.  Electricity  crowds  out  steam.  Ships 
must  cover  every  ocean;  from  sloops  they  expand  into 
floating  palaces,  their  capacity  from  a  dozen  passengers 
and  a  hundred  pounds  of  freight  to  the  population  of  a 
city  and  provisions  for  myriads  of  people.  Gold  mines 
must  be  rich  and  prolific  to  maintain  such  railroad  sys- 
tems and  such  fleets,  with  telephones  and  telegraphs 
to  rival  the  human  tongue  in  garrulousness.  To  these 
are  to  be  added  such  huge  projects  as  the  Panama 
Canal  and  the  barge  canal  in  the  State  of  New  York. 
These  alone  will  use  up  a  year's  product  of  all  the  gold 
mines  of  the  globe. 

Man  not  only  has  wants;  he  is  a  fighting  animal. 
From  clubs  and  bows  and  arrows,  to  knives  and  toma- 
hawks and  swords,  to  muskets  and  carronades,  to 
Krag-Jorgensen  rifles,  to  Maxim  and  Krupp  cannon. 


OVER  SUPPLY  OF  GOLD  UNLIKELY     135 

to  vast  parks  of  artillery,  to  vessels  of  war  like  for- 
tresses, he  prepares  for  defense  and  aggressive  war. 
He  strains  arsenals  and  foundries  to  the  utmost  that 
his  army  and  his  navy  may  match  those  of  his  rival. 
His  grandest  structures  go  down  in  ruin  in  the  harbor 
of  Havana,  at  Manila,  before  Port  Arthur,  on  the 
Straits  of  Korea,  while  often  accident  destroys  great 
battleships  which  war  has  spared.  The  galleon  of 
Columbus  is  hardly  more  obsolete  than  the  vessels 
which  Nelson  led  to  victory  at  Trafalgar,  or  Farragut 
sailed  in  triumph  to  Mobile.  A  great  navy  must  be 
always  in  process  of  renewal.  Dr.  Osier's  theory  that 
senility  creeps  upon  man  before  forty,  or  Admiral 
Dewey's  counsel  that  only  young  commanders  can 
handle  fleets,  applies  more  intensely  to  ships  them- 
selves. A  decade  puts  them  under  suspicion.  After 
twenty  years  they  must  go  to  the  ship-yards  to  be 
rebuilt  like  the  famous  Oregon,  or  be  turned  aside  as 
curiosities  like  the  old  Constitution. 

The  case  is  much  the  same  with  the  merchant 
marine.  Who  would  choose  now  to  cross  the  Atlantic 
in  the  little  vessels  that  brought  the  immigrants  to 
Jamestown  and  Plymouth?  The  Great  Eastern  was 
broken  up  as  too  large  for  use  and  profit.  Now  more 
spacious  steamships  are  common  carriers  on  both 
great  oceans. 

Invention  destroys  as  well  as  constructs.  An- 
cient armor,  antique  weapons  are  ornaments,  strange 
but  harmless.  They  may  decorate  the  Tower  of  Lon- 
don, and  the  museums  of  Paris  and  Berlin.  The  year 
is  rare  in  which  a  new  gun  does  not  assert  a  more  hor- 
rible power  to  wound  and  kill  men  in  masses,  or  a 


136  GOLD  SUPPLY  AND  PROSPERITY 

novel  explosive  of  tremendous  energy  does  not  offer  to 
work  havoc  on  sea  and  land  more  secretly,  more  quick- 
ly and  more  widely.  Then  the  demons  of  less  degree 
must  give  way  to  the  greater  masters  of  destruction. 
Industry  devises  tools  and  machinery  today  to  make 
for  tomorrow  those  which  will  work  faster,  cheaper, 
more  efficiently.  Furnace  and  factory  go  out  of  fash- 
ion some  degrees  less  quickly  than  styles  of  dress.  The 
engine  gives  place  to  the  dynamo.  The  locomotive 
which  drew  the  heaviest  and  most  speedy  trains,  is 
retired,  and  young  heirs  leap  to  control  on  the  track. 
The  triumphs  of  yesterday's  mechanism  are  broken  up 
for  their  metal  at  the  end  of  the  year. 

How  many  mines  for  how  many  years  will  provide 
gold  enough  to  pay  for  the  wrecks  and  outcasts  in  the 
junk -heaps  of  the  world?  And  how  rapidly  these 
junk-heaps  pile  up ! 

Testimony  seems  to  prove  that  wages  and  prices 
have  risen  very  much  in  Asia  and  the  oriental  islands, 
while  interest  has  fallen  there.  These  results  are  to 
be  traced  in  no  small  degree  to  the  closer  relations  to 
the  western  nations,  leading  to  a  higher  standard  of 
living  and  to  some  changes  in  the  methods  of  traffic. 
The  adoption  of  gold  either  as  a  legal  standard  or  as  a 
measure  of  value  in  less  specific  form,  tends  in  the 
Asiatic  countries  to  a  modification  in  the  expression 
of  values,  rather  than  to  such  an  evolution  as  can  be 
set  forth  just  now  in  statistics.  The  addition  to  the 
number  of  nations  and  of  people  that  employ  gold  in 
any  degree  as  a  basis  of  industry  and  trade,  builds  up 
to  that  extent  a  barrier  against  an  excess  of  that  metal. 


OVER  SUPPLY  OF  GOLD  UNLIKELY  137 

Gold,  as  it  is  mined  and  put  into  human  hands,  is 
soon  divided  between  capital  and  currency.  The  cap- 
ital may  become  fixed  in  property  earning  profits,  and 
the  dividends  may  be  added  to  the  circulation.  The 
share  so  invested  in  many  forms  undoubtedly  becomes 
greater  and  greater,  and  so  will  swell  the  volume  of 
production,  and  unless  labor-saving  machinery  pre- 
vents, the  demand  for  labor.  The  prevalence  of  altru- 
ism creates  a  sort  of  fixed  capital  which  is  not  meant 
to  give  returns  in  dollars  and  cents.  Last  year,  for 
example,  fair  summaries  and  estimates  place  the  gifts 
for  charity,  education  and  religion  in  the  United  States 
at  not  much  less  than  the  total  value  of  the  gold  pro- 
duct of  the  country  for  the  same  period.  These  went 
into  hospitals,  church  edifices,  libraries,  museums, 
schools,  colleges  and  universities.  They  will  all  bear 
fruit,  precious  and  health-giving,  but  who  shall  place 
such  grapes,  such  figs,  such  wheat  and  corn  in  any 
scales  with  coin  or  merchandise? 

Certain  critics  delight  in  denouncing  as  idle  the 
gold  held  in  the  Treasury  of  the  United  States.  Of  the 
whole  sum  of  $764,000,000,  gold  certificates  represent 
$525,000,000,  and  to  that  extent  the  metal  serves  as 
currency  for  all  uses  of  the  banks  and  the  people.  The 
Treasury  readily  pays  coin  for  all  obligations  of  the 
government.  The  certificates  are,  however,  preferred 
to  the  actual  coin  everywhere  in  this  country,  except 
on  the  Pacific  slope;  even  by  these  critics  as  more  con- 
venient and  not  liable  to  loss  of  weight  and  value.  The 
treasure  in  the  government  valuing  including  the  re- 
serve of  $150,000,000  held  to  redeem  the  United  States 
notes,  is  the  corner  stone  of  American  credit,  public 


138  GOLD  SUPPLY  AND  PROSPERITY 

and  private.  He  is  a  bold  financier  who  will  allege 
that  it  can  in  any  way  be  more  useful  or  contribute 
more  to  the  life  and  safety  of  industry  and  commerce, 
of  production  and  consumption. 

Enterprises  like  the  Siberian  railroad,  the  Cape  to 
Cairo  road,  the  projects  in  India,  the  exploitation  of 
Korea  and  China,  draw  heavily  on  the  world's  re- 
sources. The  direct  cost  of  the  Russian- Japanese  war, 
for  which  loans  were  so  lavishly  made  in  Europe  and 
the  United  States,  will  not  be  paid  by  all  the  bullion 
that  the  earth's  gold  mines  can  furnish  in  two  years,  if 
in  three  years.  The  indirect  burdens  from  that  conflict 
will  very  likely  be  twice  as  much. 

Whatever  might  be  the  effect  on  rent  if  the  inflow 
of  gold  could  work  alone,  it  is  hardly  worth  while  to 
consider.  For  the  growth  of  our  population,  the  move- 
ment of  inhabitants  in  town  and  country,  the  develop- 
ment of  fresh  industries,  relative  local  taxation,  and 
above  all  the  multiplied  facilities  of  locomotion,  es- 
pecially by  trolley,  set  this  matter  on  a  novel  plane,  in 
strange  lights,  and  render  capital  and  currency  less 
potent  factors  in  their  direct  bearing.  This  theme, 
however,  to  be  treated  worthily  would  exhaust  a  chap- 
ter, i 

As  in  all  mundane  affairs  contrary  currents  con- 
tend in  the  monetary  field.  The  increase  in  the  supply 
of  gold  is  to  offset  the  cost  of  war,  of  armaments  on 
sea  and  land,  of  immense  projects  in  many  countries 
of  the  wants  of  man,  novel,  greedy,  ever-developing, 
ever  more  expansive.  It  is  far  from  easy  to  strike  a 
just  balance  where  so  much  is  variable,  uncertain, 
dependent  on  human  whims.    He  will  greatly  err  who 


OVER  SUPPLY  OF  GOLD  UNLIKELY  139 

shall  jump  at  the  conclusion  that  an  arithmetical  state- 
ment can  be  made  that  prices  will  advance  in  the  ratio 
of  the  increase  in  gold,  or  that  wages  or  dividends  can 
mount  on  the  same  rungs,  or  that  interest  will  fail  to 
be  affected  as  always  by  industrial  and  commercial 
activity  and  by  those  moral  influences  which  check  or 
give  impetus  to  adventure. 

The  real  problem  presented  is:  Does  the  increas- 
ing production  of  gold  threaten  such  an  advance  in 
prices,  wages  and  rent  and  such  a  change  in  interest  as 
to  justify  alarm?  It  must  be  admitted  that  the  ten- 
dency of  that  increase,  if  acting  alone,  would  be  to 
cause  a  decided  rise  all  along  the  line,  except  in  inter- 
est, and  in  that  item  to  lead  to  a  fall.  The  checks,  how- 
ever, are  many,  various  and  powerful.  The  streams 
and  tides  and  waves  of  business,  turbulent  as  they  are 
at  times,  normally  seek  an  equilibrium.  The  inflow  of 
the  yellow  metal  has  put  an  end  to  the  wild  clamor  of 
many  million  men  in  this  country  for  a  cheaper  cur- 
rency and  more  of  it.  Not  a  few  of  us  were  watching 
lest  we  were  entering  into  waters  too  deep  and  too 
dark.  The  flood-tide  of  currency  has  not  yet,  fast  as  it 
is  rising,  reached  the  line  of  actual,  present  peril.  A 
fact  which  augments  the  danger  also  shows  the  confi- 
dence of  men  whose  judgment  is  worth  much,  that  the 
supply  of  gold  is  not  yet  too  great  for  use.  Notable  is 
it,  too,  that  sage  financiers,  active  in  large  affairs,  take 
full  share  in  the  inflation.  For  during  the  past  fiscal 
year  an  addition  of  $60,000,000  was  made  to  the  circu- 
lating notes  of  the  National  banks.  The  digestion  of 
$5,000,000  a  month  of  new  bank  currency  proves  that 
our  currency  does  not  yet  feel  overcome  and  intoxi- 


140  GOLD  SUPPLY  AND  PROSPERITY 

cated  by  the  yellow  metal.  For  the  net  increase  in 
notes  based  on  bonds  in  the  month  of  October,  1905, 
was  $8,249,280. 

He  who  will  study  these  subjects  most  closely 
and  deeply  will  be  least  dogmatic  in  his  predictions. 
He  will  be  inclined  to  end  his  most  positive  sentence 
with  an  interrogation  mark.  For  he  will  try  to  esti- 
mate justly  the  contending  forces.  The  clearer  his 
vision  the  better  he  will  see  that  a  real  battle  is  arrayed 
between  mighty  antagonists.  He  will  have  his  con- 
victions and  his  desires,  yet  he  will  recognize  that 
events  are  the  resultant  not  of  a  single  force,  but  of 
many  factors,  often  subtle  and  from  different  quarters. 
What  these  factors  are  which  act  against  the  effects  of 
the  increase  of  gold  to  modify  the  monetary  and  indus- 
trial and  social  structure,  have  been  indicated  rather 
than  fully  described.  Sometimes  it  happens  that  the 
fairest  and  best  verdict  which  can  be  rendered  on  a 
review  of  evidence  is  "not  proven,"  and  it  may  be  that 
gold  is  not  so  bad  a  culprit  after  all. 


HORACE  WHITE 

Ex-Editor  New  York  Evening  Post 


How  Gold  Operates 

By  Horace;  White 

T  AM  asked  to  give  my  opinion  as  to  the  effects  of 
the  rapidly  increasing  supply  of  gold  upon  (a) 
prices,  (b)  wages,  (c)  rents,  (d)  interest,  (e)  securi- 
ties, (f)  industry,  (g)  business  ethics,  (h)  politics,  (i) 
society. 

The  only  way  in  which  an  increasing  supply  of 
gold  can  affect  the  prices  of  commodities  is  by  increas- 
ing  the  demand  for  them.  New  gold  taken  from  the 
earth  by  the  miner  is  not  usually  hoarded.  It  is  either 
expended  by  him  for  commodities,  or  partly  expended 
and  partlyinvested.  The  part  invested  is  expended 
for  commodities  by  somebody  else.  If  deposited  in  a 
bank  it  is  expended  by  the  person  who  borrows  it  from 
the  bank.  If  invested  in  a  railroad  or  government 
bond,  it  is  expended  by  the  seller  of  the  bond.  There 
is  no  stopping  place  between  the  new  gold  and  the 
commodities — food,  clothing  and  other  necessaries 
and  luxuries — unless  the  gold  i^sjioarded.  In  the  latter 
case  it  has  no  more  effect  on  prices  than  it  had  before 
it  was  taken  out  of  the  ground. 

In  short,   gold  is  itself  demand  for  goods,  new 

gold  is  new  demand,  an  increasing  supply  of  it  is  an 

Vj^  ( ^increasing  demand,  and  this  causes  a  rise  of  prices, 

\|rother  things  being  equal.     Professor  Cairnes  showed, 

^in  a  series  of  essays  that  have  become  classical,  how 

143 


144  GOLD  SUPPLY  AND  PROSPERITY 

the  rise  of  prices  began  and  gradually  spread  over  the 
world  in  response  to  the  new  gold  discoveries  in  Cali- 
fornia and  Australia,  about  the  middle  of  the  last  cen- 
tury.* His  was  the  first  careful  analysis  of  the  facts 
and  exposition  of  the  principles  governing  the  phe- 
nomena of  rising  prices  due  to  an  increased  supply  of 
gold.  He  showed  how  the  rise  took  place,  first  in  the 
localities  where  the  gold  was  found,  howit  extended 
thence  to  the  countries  which  supplied  these  localities 
with  goods,~an3Thence  to  the  nations  with  which  these 
countries  traded,  until  finally  all  parts  of  the  commer- 
cial world  felt  the  influence  of  the  new  gold,  this  influ- 
ence manifesting  itself  in  every  case  by  an  increased 
demand  for  goods. 

It  was  shown  by  statistics  that  the  prices  of  com- 
modities did  not  all  advance  in  the  same  ratio.  The 
increase  took  effect  first  upon  the  articles  which  the 
gold  producers  wanted,  articles  in  most  common  use ; 
necessaries,  not  luxuries.  They  wanted  food  and 
clothing,  mining  tools  and  implements,  perhaps  liquor, 
tobacco  and  playing  cards,  but  they  did  not  want  silks 
and  satins,  pianos,  or  pictures  by  the  old  masters.  The 
rise  in  prices  manifested  itself  in  the  order  of  the  pur- 
chasers' most  pressing  needs. 

It  was  noticedalso  that  these  effects  of  the  new 
gold  discoveries  were  more  striking  in  countries  where 
the  credit  system  was  well  developed  by  means  of 
banks  than  in  those  which  depended  mainly  upon  hand 
to  hand  trading.    The  obvious  reason  was  that  in  the 


*Essays   in   Political   Economy,    Theoretical   and   Applied,    by    J.    E. 
Cairnes,  London,   1873. 


HOW  GOLD  OPERATES  145 

former  each  dollar  of  new  gold  became  the  basis  of 
three  or  four  dollars  of  credit  given  to  the  producing 
and  trading  community,  wkile  in  the  latter  no  such 
augmentation  took  place,  since  each  dollar  passed  for 
one  only.  Thus,  in  the  United  States  and  England  the 
effects  of  the  new  gold  on  prices  was  manifested  more 
promptly  and  decidedly  than  in  France  and  Spain,  and 
in  all  of  them  more  so  than  in  India  and  China. 

The  effect  of  new  supplies  of  gold  on  wages  is 
similar  to  that  on  prices  and  is  closely  connected  with 
it.  New  demands  for  goods  means  greater  demand  for 
labor  and  hence  higher  wages,  but  the  rise  in  wages  is 
not  simultaneous  and  uniform  throughout  the  indus- 
trial world.  It  follows  the  same  order  as  the  rise  in 
prices  of  different  kinds  of  goods.  The  wages  of  piano 
makers  and  silk  weavers  will  not  rise  so  soon  as  those 
of  sailors,  iron  founders  and  shoemakers. 

Wages  rise  first  and  most  rapidly  in  the  mining 
districts  and  more  slowly  in  the  countries  which  re- 
ceive the  new  gold  in  the  way  of  trade.  One  of  the 
early  phenomena  in  California  in  the  fifties  was  that 
large  numbers  of  sailors  abandoned  their  ships  as  soon 
as  they  arrived  at  San  Francisco  and  betook  them- 
selves to  the  gold  fields  and  became  placer  miners. 
The  captains  were  obliged  to  offer  higher  wages  to  get 
men  to  navigate  their  ships.  Similarly  the  farmers  in 
California  were  compelled  to  pay  more  for  agricultural 
labor.  House  builders  had  to  pay  more  to  carpenters, 
glaziers,  wood  cutters,  and  so  on.  These  were  rather 
glaring  illustrations  of  the  effect  of  new  supplies  of 
gold  on  wages.  They  were  not  different  in  kind  but 
only  in  degree  from  the  effects  which  took  place  in 


146  GOLD  SUPPLY  AND  PROSPERITY 

more  distant  regions  through  the  medium  of  trade 
relations  with  California.  It  is  within  the  writer's 
recollection  that  there  was  a  considerable  exodus  of 
gold  seekers  from  a  certain  town  in  Wisconsin  in  the 
years  1849  and  1850.  These  emigrants  were  of  the 
most  hardy  and  eterprising  members  of  the  com- 
munity and  their  departure  left  a  vacuum  in  the  labor 
market  at  home.  Similar  movements  took  place  in  all 
parts  of  the  country. 

A  secondary  effect,  not  so  obvious,  is  that  the  rise 
of  wages  thus  occasioned  enables  the  wage  earning 
class  to  become  greater  consumers  of  goods.  Their 
demand  is  added  to  that  of  the  gold  miners  in  the 
market  for  commodities.  But  for  this  secondary  effect 
the  market  would  become  glutted  as  soon  as  the  means 
of  production  should  have  overtaken  the  new  demand 
of  the  miners.  Thus,  the  wage  earners  being  much  the 
largest  body  of  consumers  of  the  things  they  severally 
produce,  steady  the  market,  which  would  otherwise 
relapse  to  its  former  condition.  There  is  no  doubt  in 
my  mind,  therefore,  that  new  supplies  of  gold,  i.  e.,  a 
supply  exceeding  the  loss  due  to  abrasion  and  accident, 
does  tend  to  an  advance  of  wa^es.  Whether  it  in- 
creases the  world's  wealth  as  a  whole  'is  more  doubtful. 
It  is  not  an  advantage  to  society  to  use  two  dollars  to 
effect  its  exchanges  where  one  dollar  answered  the 
same  purpose  before.  But,  it  is  an  advantage  to  the 
wage  earning  class,  who  are  the  great  majority  of  all 
countries,  to  have  steadier  employment  and  better 
pay.  If  new  gold  does  not  increase  the  world's  wealth 
as  a  whole  but  does  increase  wages,  it  follows  that 
persons  haying  fixed  incomes,  such  as  holders  of  gov- 


HOW  GOLD  OPERATES  147 

ernment  bonds,  annuitants  and  mortgagees,  are  losers 
by  the  same  process. 

At  all  events,  we  should  dismiss  from  our  minds 
the  thought  that  new  supplies  of  gold  cause  prices  to 
advance  by  any  occult  or  magical  process,  or  otherwise 
than  through  the  demand  and  supply  of  goods  in  the 
market.  Many  persons  argue  as  though  the  producers 
throughout  the  world,  seeing  or  hearing  of  a  great  out- 
put of  gold  in  South  Africa  and  in  the  Klondike  and 
elsewhere,  raise  the  prices  of  their  products  accord- 
ingly.   Of  course,  no  such  thing  happens. 

Rent  is  the  price^  paid  for  the  use  of  any  particular 
piece  of  land.  There  is  always  some  land  that  nobody 
will  occupy  even  as  a  free  gift.  There  is  other  land 
that  some  persons  will  occupy  as  a  free  gift  but  will 
not  pay  anything  for,  since  its  produce  will  not  yield 
more  than  the  amount  that  could  be  obtained  with 
equal  effort  otherwise.  Land  that  will  yield  more  than 
this  by  reason  of  its  fertility  or  its  situation  will  com- 
mand an  annual  rental.  Situation  is  quite  as  important 
as  fertility  and  often,  as  in  the  case  of  town  and  city 
lots,  vastly  more  so  in  civilized  countries.  The  chief 
determining  factor  of  r^irt^is  population.  Other  things 
being  equal,  rents  are  high  where  population  is  dense 
and  low  where  it  is  scanty.  They  rise  where  popula- 
tion is  increasing  and  fall  where  it  is  diminishing.  It 
cannot  be  affirmed  that  new  supplies  of  gold  tend  to 
increase  population  as  a  whole.  Do  they  tend  to  shift 
it  from  place  to  place?  We  have  seen  that  they  do 
draw  it  to  the  gold  fields  and  they  may  have  other  like 
effects  in  concentrating  it  in  particular  places  and  on 
particular    industries,    but    such    movements    would 


148  GOLD  SUPPLY  AND  PROSPERITY 

merely  raise  rent  in  some  places  and  lower  it  in  others. 
I  see  no  reason  to  suppose  that  increased  supplies  of 
gold  have  any  effect  upon  rent  one  way  or  the  other. 
It  should  be  observed  that  it  is  not  the  mere  price  paid 

I  in  money  for  the  occupation  of  land  but  the  amount 
of  goods — the  satisfaction  of  human  wants — that  de- 

'  termines  the  rental  value  of  land.  Therefore,  doubling 
the  amount  of  gold  in  the  world  would  not  necessarily 
raise  real  rents  at  all. 

Interest  is  the  sum  paid  for  the  use  of  capital 
available  for  productive  industry,  m  tTie  operation  of 
which,  gold  or  other  money  is  merely  the  instrument 
by  which  capital  is  measured  and  exchanged.  Such 
capital  is  either  fixed,  such  as  buildings,  railways  and 
machinery,  or  circulating,  as  tools,  raw  materials,  food, 
domestic  animals  and  store  goods  of  all  kinds,  which 
constitute  the  real  "w^ge  fund"  ofth£  community. 
The  amount  which  can  be  paid  for  tlie  use  of  this  ac- 
cumulated stock  by  persons  engaged  in  active  indus- 
try depends  upon  the  productiveness  of  industry,  and 
it  varies  at  different  times  and  places.  It  is  subject  to 
the  law  of  supply  and  demand.  The  stock,  whether 
large  or  small,  is  at  the  command  of  those  who  have 
(as  it  generally  is),  it  is  based  upon  gold  and  therefore 
money,  whether  gold  or  credit.  If  it  be  credit  money 
we  may  consider  it  gold. 

Now  the  quantity  of  gqld  in  the  world  cannot 
make  the  quanthv  of  capital  in  the  world,  jvhether 
fixed  or  circulating,  either  greater  or  less  than  it  is,  at 
any  particular  time.  Nor  can  it  increase  or  lessen  the 
productiveness  of  industry,  or  the  rate  of  profit,  or  the 
gprivri^y  or  ipvpgtrnpnts      X^^^efore  it  Cannot  affect 


HOW  GOLD  OPERATES  149 

the  rate  of  ini£r£St_one  way  or  the  other.  I  have  never 
found,  in  the  experience,  observations,  and  reading  of 
a  life  time,  an  instance  where  a  new  supply  of  gold 
from  the  mines,  however  large,  has  caused  a  reduction 
of  the  rate  of  interest.  There  may  be  a  momentary 
lessening  of  the  rate  in  a  case  where  a  particular  bank 
or  monetary  centre  receives  a  heavy  consignment,  be- 
fore a  distribution  of  the  new  supply  from  place  to 
place  or  from  country  to  country  can  be  made  through 
the  ordinary  channels  of  commerce.  But  that  is  of  no 
more  consequence  as  regards  the  general  rate  of  inter- 
est than  the  daily  changes  in  the  rate  for  call  loans  on 
the  Stock  Exchange. 

If  the  increasing  output  of  gold  does  not  affect  the 
rate  of  interest,  it  cannot  affect  the  price  of  securities,  y 
The  prices  of  government  bonds  and  other  first  class 
securities  have  been  going  up  instead  of  down  during 
the  past  quarter  of  a  century.  In  other  words,  the  rate 
of  interest  on  this  class  of  investments  has  been  fall- 
ing, but  not  in  consequence  of  the  output  of  gold  from 
the  mines.  This  is  due  to  the  increase  of  wealth  in  the 
community  and  to  the  competition  of  buyers  seeking 
absolutely  safe  investments.  The  increase  of  wealth 
is  due  to  the  development  of  natural  resourcgs^-not 
to  an  increase  in  the  nuntbeTot  counters  by  which  the 
resulting  products  are  estimated. 

My  views  of  the  effects  of  the  rapidly  increasing 
output  and  supply  of  gold  upon  industry  and  society 
have  been  indicated  by  what  has  gone  before.  The 
effects  upon  business  ethics  and  politics,  if  any,  are  be- 
yond my  ken.    My  belief  is  that  they  are  nil. 


Hon.  JOHN  De  WITT  WARNER 

Ex-Congressman  from  New  York 


Some  Gold  Problems 

By  Hon.  John  DeWitt  Warner 

FOR  thirty  years  past  we  have  had  alternating 
periods  of  business  confidence  and  business  de- 
pression; and  also  a  succession  of  events  affecting  to 
an  extreme  degree  the  "visible"  supply  of  gold  avail- 
able for  currency. 

No  one  contends  that  the  latter  series  is  exclu- 
sively responsible  for  the  former.  Few  believe  that 
they  had  no  effect  on  each  other.  Between  these  is  the 
debatable  ground  on  which  many  congressional,  and  at 
least  two  presidential,  compaigns  have  been  fought; 
and  which,  as  yet  conquered  by  neither,  is  claimed  by 
all  during  the  truce  (on  this  issue)  of  the  last  few 
years. 

Meanwhile  developing  conditions  of  gold  produc- 
tion are  such  as  to  ensure :  First,  that  the  world's  sup- 
ply of  gold  currency  has  increased,  is  increasing,  and 
for  some  time  to  come  must  increase  out  of  all  propor- 
tion to  any  growth  that  can  be  expected  in  normal 
demand  therefor.  Heretofore  we  have  been  too  prone 
to  ignore  such  developments  until  they  met  us. 

The  divisions  of  the  question  as  proposed — the 
effect  of  increasing  gold  supply  on  "(a)  Prices,  (b) 
Wages,  (c)  Rents,  (d)  Interest,  (e)  Securities,  (f) 
Industry,   (g)   Business  Ethics,   (h)   Politics,  and   (i) 

151 


152  GOLD  SUPPLY  AND  PROSPERITY 

Society" — interdependent  as  they  are,  suggest  a  pre- 
liminary caution :  That  is,  we  must  not  forget  that  gold 
production,  the  effect  of  which  we  are  called  to  predict, 
is  but  one  of  many  causes — some  of  them  rapidly 
growing  in  proportionate  importance — that  affect  each 
of  the  items  noted.  However  correctly,  therefore,  the 
effect  of  greater  gold  supply  upon  each  of  these  may 
be  foretold;  as  to  any  one  this  effect  may  be  in  fact 
either  masked,  accentuated,  minimized  or  reversed  by 
other  factors. 

In  short : — Coined  gold  is  nowhere  an  independent 
and  absolute  currency  standard;  and  is  not  even  ap- 
proximately so  in  many  cases  where  it  is  theoretically 
such. 

To  an  already  large  and  rapidly  increasing  extent 
the  market  value  of  gold  as  currency  is  so  dependent 
upon  relations  between  other  commodities  that  they, 
or  the  resultant  of  their  relations  with  others  (includ- 
ing gold),  tend  radically  to  vary  the  actual  standard  of 
exchange  from  any  that  can  be  fixed  by  calculation  of 
demand  for  gold  as  compared  with  its  supply. 

But  our  economic  philosophy  is  based  on  the  as- 
sumption that  our  present  currency  standard  is  the 
resultant  of  the  need  of  gold  to  facilitate  exchange  of 
property,  as  compared  with  the  supply  available  for 
such  purpose.  There  is,  therefore,  a  normally  widen- 
ing gap  between  theory  and  fact — the  actual  standard 
ever  becoming  less  exclusively  one  of  gold  value,  and 
the  theoretical  one  ever  more  so. 

The  presumption  is  that  we  have  lately  passed  the 
point  in  the  world's  history  toward  which  economic 
gravitation  has  heretofore  tended,  and  at  which  this 


SOME  GOLD  PROBLEMS  153 

theory  was  most  nearly  correct ;  and  that,  having  now 
left  perihelion,  we  shall  hereafter  find  our  actual  course 
varying  more  and  more  from  any  that  can  be  calcu- 
lated on  the  old  theory. 

Taking  up  seriatim  the  several  branches  of  the 
inquiry  proposed : — 

(a)  Increasing  gold  product  will  tend  to  raise 
Prices,  but  to  no  extent  comparable  to  the  resulting 
increase  in  gold  supply  as  compared  with  the  apparent 
demand.  This  rise  in  Prices  will  be  comparatively 
prompt,  or  accelerated,  directly  (though  not  propor- 
tionately), as  gold  production  increases.  This  effect 
will  be  most  marked  with  staples  of  widest  use,  and  of 
most  general  import  or  export  throughout  the  World 
— such  as  cotton,  iron,  wheat,  wool,  etc. 

(b)  Wages  will  tend  to  rise,  but  so  slowly  on  the 
whole,  and  so  far  behind  prices,  that  their  higher  level 
will  be  generally  fixed  as  the  result  of  ''labor  troubles" ; 
which  will  become  so  acute  as  to  be  effective  only  after 
somewhat  of  forced  relief  has  been  had  in  other  direc- 
tions from  the  hardships  of  wage  earners — from  high 
prices  with  low  wages.  This  tendency  of  wages  to  rise, 
and  consequent  readjustment,  will  be  most  prompt  in 
cities. 

(c)  Rents  so  largely  depend  on  other  factors  that, 
though  with  tendency  to  rise,  they  will  do  so  but  slow- 
ly in  the  long  run,  and  this  mainly  as  the  "net"  of 
fluctuations — in  which  high  rental  rates  will  be  fol- 
lowed by  low  ones,  and  vice  versa. 

(d)  Interest  rates  also  are  so  much  more  depend- 
ent on  other  considerations  that  they  will  be  little  af- 


154  GOLD  SUPPLY  AND  PROSPERITY 

fected  in  the  long  run  by  increased  gold  production — 
though  probably  more  so  than  rents.  On  the  whole, 
interest  will  tend  to  rise,  though  as  the  "net"  of  fluctu- 
ations rather  than  steadily,  or  in  pace  with  gold  pro- 
duction. 

(e)  Securities  (long  term),  will  be  more  affected 
than  either  of  the  foregoing.  The  class  of  investors 
in  them  is  that  best  posted  on  gold  production;  most 
coldly  logical  in  its  calculations,  and  most  prompt  to 
exaggerate  the  effect  of  this  factor  as  compared  with 
that  of  others.  The  tendency  will  be  to  lower  the  price 
of  most  securities  (as  compared  with  demand  assets), 
in  proportion  to  the  length  of  term  they  have  to  run — 
a  process  likely  at  first  to  be  overdone. 

(f)  The  effect  on  Industry  in  general  will  be  bad ; 
but,  as  I  believe,  too  slight  to  be  generally  noticeable, 
in  view  of  causes  that  will  far  more  than  counteract  it. 
In  special  and  local  cases,  however,  the  deplorable  ef- 
fects of  other  readjustments  will  be  greatly  increased. 

(g)  Business  Ethics  are  unfavorably  affected  by 
any  change  in  currency  standard.  For,  by  falsifying 
the  terms  by  which  commerce  reports  progress  Busi- 
ness is  made  more  of  a  "gamble"  to  most  men,  and 
more  of  a  scheme  to  profit  by  others'  ignorance  and 
imprudence  on  the  part  of  those  who  are  cool  and 
shrewd  enough  to  profit  thereby.  Increase  of  prices  is, 
however,  so  little  more  dangerous  than  decrease  that 
the  evil  effects  on  business  ethics  should  be  charged 
to  instability  of  standards  rather  than  to  excessive  or 
scanty  gold  production. 


SOME  GOLD  PROBLEMS  155 

(h)  The  effect  on  Politics  will  be  to  stir  a  vague 
discontent  that  in  itself  tends  to  demoralize — as  dis- 
tinguished from  an  intelligent  perception  of  wrongs  to 
be  righted,  that  is  the  mainspring  of  political  reform. 
The  main  reason  for  this  will  be  the  comparative  slow- 
ness with  which  wages  will  overtake  prices. 

(i)  The  effect  on  Society  will  be  toward  increase 
in  the  class  of  spendthrift  parvenus,  and  increased  de- 
pendence of  the  less  capable  among  wage  earners.  In 
comparison  with  other  causes  working  toward  the 
same  end,  and  counteracting  forces  that  are  also  act- 
ing, I  cannot,  however,  believe  that  any  probable  in- 
crease of  gold  production  is  of  serious  import  on  this 
score.  And  when  all  is  said,  the  last  word  should  be 
one  of  caution  not  to  over-estimate  the  effect  of  in- 
creased gold  supply  in  any  of  the  directions  noted.  The 
counteracting  forces  are  such  as  in  the  nature  of  things 
will  become  constantly  more  effective.  There  is  no 
danger  that  the  fortunes  of  humanity  or  the  course  of 
civilization  will  be  seriously  affected  by  any  cheapen- 
ing of  gold  values. 


L.  CARROLL  ROOT 
Ex-Secretary  of  the  Monetary  Commission 


Effects  of  the  Increasing  Supply  Upon 
the  Investor 

By  L.  Carroll  Root 

T  T  seems  to  be  generally  agreed,  by  those  most  com- 
petent to  comment  and  prophesy  thereon,  that  we 
are  destined  to  witness  a  continuance,  for  some  time  at 
least,  of  the  rapid  increase  in  the  production  of  gold 
which  has  taken  place  during  the  last  few  years. 

The  effects  upon  wages,  prices,  etc.,  of  this  great 
flood  of  gold  are  interesting  topics  for  speculation,  and 
may  be  watched  and  studied  with  profit  by  our  econo- 
mists and  business  men.  But  the  direction  where  the 
influence  of  this  movement  most  vitally  affects  the 
investor  is  in  relation  to  the  rate  of  interest. 

Gold  may  now  be  said  to  be  the  monetary  stand- 
ard of  the  entire  world.  And  if  the  testimony  of  metal- 
lurgists can  be  relied  upon,  the  present  increased  pro- 
duction of  this  metal  will  continue,  and  its  influence  in 
cheapening  the  value  of  gold  in  relation  to  everything 
else  will  persist. 

If,  then,  we  may  reasonably  look  forward  to  a 
period  of  increasing  prices  for  both  commodities  and 
labor  as  a  result  of  this  movement,  what  effect  shall 
we  expect  therefrom  upon  the  price  of  securities? 
Will  the  same  forces  which  tend  to  enhance  the  price 

157 


158  GOLD  SUPPLY  AND  PROSPERITY 

of  commodities  also  enhance  the  price  of  interest-bear- 
ing securities  and  correspondingly  reduce  the  rate  of 
interest  to  be  derived  therefrom? 

The  natural  answer  would  be,  Yes.  But  this  is 
because  of  an  almost  universal  confusion  between 
money  and  capital.  The  depreciation  alluded  to  as  in 
process,  or  to  be  expected,  is  a  depreciation  of  the 
money  standard,  and  not  at  all  a  depreciation  of  cap- 
ital. And  because  it  is  true  that  the  monetary  stand- 
ard may  have  a  tendency  downward  or  upward  in  rela- 
tion to  other  things,  it  is  also  true  that  interest  on 
money  may  become  something  very  different  from 
interest  on  real  capital  and  may  be  influenced  by  dif- 
ferent forces. 

Interest  on  capital  is  an  economic  phenomenon 
which  may,  under  some  circumstances,  be  considered 
quite  separate  from  interest  on  money,  or  interest  on 
capital  expressed  in  the  form  of  the  monetary  unit. 
Interest  on  capital  would  exist  if  the  monetary  system 
were  absolutely  done  away  v»^ith  and  business  carried 
on  solely  by  some  system  of  barter.  And  the  economic 
forces  which  produce  interest  (that  is,  which  make 
present  goods  more  valuable  than  the  same  goods  at 
some  future  time),  would  still  prevail  and  interest 
would  result,  as  it  does  now. 

In  other  words,  the  forces  which  produce  interest 
on  capital  operate  independently  of  the  monetary  sys- 
tem. Assume,  for  example,  that  these  forces  are  such 
as  to  result  in  a  normal  rate  of  interest  of  5%  for  a 
certain  period  of  20  years.  This  we  assume  is  what  the 
real  interest  on  capital  during  this  period  would  be. 


EFFECTS  OF  THE  INCREASING  SUPPLY       159 

without  regard  to  the  monetary  system  or  any  change 
taking  place  therein.  That  is  to  say,  one  loanmg  100 
units  of  capital  (for  example,  machinery,  material  and 
subsistence  available  for  a  manufacturing  busmess), 
will  have  returned  to  him  each  year  5%  of  his  capital, 
in  addition  to  the  return  of  the  whole  100  units  at  the 
end  of  the  period.  If  both  borrower  and  lender  were 
agreed  upon  these  facts  a  loan  might  be  made,  at  the 
rate  suggested,  based  upon  the  turning  over  of  actual 
capital  in  forms  as  agreed  upon  and  the  repayment 
thereof  in  similar  forms. 

But  in  our  modern  business  world  actual  capital 
is  not  frequently  loaned  in  its  concrete  forms,  but  loans 
are  made  and  expressed  in  the  monetary  standard.    It 
therefore  becomes  a  very  important  question  whether 
or  not  the  monetary  standard  is  going  to  remain  con- 
stant during  the  period  in  question  in  relation  to  the 
forms  of  capital  contemplated  by  the  parties.  Under  an 
economic  condition  as  has  been  suggested  just  above, 
if  satisfactory  assurance  were  given  to  all  parties  that 
there  would  be  no  change  during  the  20  years  in  the 
relation  between  the  monetary  standard  and  the  con- 
crete   goods   into   which   the   borrower   must   put   his 
money  when  he  borrows  it,  and  into  which  the  lender 
when  his  loan  is  paid  off  must  again  convert  his  money 
in  order  to  make  a  good  business  use  of  it  himself,  both 
parties  will  be  satisfied  to  express  their  loan  in  the 
terms  of  money,  and  to  specify  the  rate  thereon  as  5%, 
being  the  rate  on  actual  capital  which  they  are  both 
satisfied  to  contract  for. 

But   if   at   the   outset   equally   definite   assurance 
were  given  upon  which  both  parties  to  the  contract 


160  GOLD  SUPPLY  AND  PROSPERITY 

were  satisfied  to  rely,  that  the  monetary  unit  (for  one 
cause  or  another),  was  going  to  steadily  depreciate 
during  the  20  years  in  question  at  the  rate  of  S^o  per 
annum  in  its  relation  to  the  economic  goods  in  which 
both  are  interested;  under  such  circumstances,  is  it 
not  clear  that  a  monetary  interest  rate  of  substantially 
lO^o  per  annum  will  be  required  in  order  to  properly 
express,  through  the  medium  of  a  money  loan,  the  in- 
tention of  the  parties  that  the  lender  shall  have  his  act- 
ual capital  returned,  together  with  5%  per  annum  in 
addition  thereto?  For  otherwise,  if  only  5^  interest 
in  money  were  to  be  agreed  upon,  the  lender  would  see 
the  principal  of  his  loan  depreciated  at  the  end  of  the 
first  year  to  such  an  extent  that  the  interest  which  he 
received  would  not  quite  restore  it  to  its  original  value, 
let  alone  giving  him  the  net  return  which  was  contem- 
plated. 

Plainly,  if  the  comparative  depreciation  of  the 
monetary  standard  could  be  foreseen,  there  is  no  ques- 
tion but  that  both  borrower  and  lender  would  be  will- 
ing to  reckon  with  it  in  fixing  the  money  rate  of  inter- 
est which  would  be  the  equivalent  of  the  5%  interest 
on  actual  capital  in  contemplation  by  them  and  which 
would  be  in  harmony  with  the  economic  conditions 
assumed.  Then,  there  would  be  no  more  difficulty  in 
translating  a  real  interest  rate  of  5%  into  a  monetary 
interest  rate  of,  say  10^,  than  there  would  be  in  trans- 
lating $5  of  United  States  money  into,  say,  $10  of  Mex- 
ican standard. 

When  the  transaction  is  viewed  through  the 
•nedium  of  the  monetary  standard,  as  is,  of  course,  the 


EFFECTS  OF  THE  INCREASING  SUPPLY       161 

usual  case,  the  effect  is  the  same.  For  the  same  eco- 
nomic forces  which  would  have  resulted  in  a  normal 
rate  oi  5%  if  the  monetary  standard  had  been  constant 
in  its  relation  to  capital,  will  actually  tend  to  produce 
a  normal  rate  of  10%  if  the  monetary  standard  is 
steadily  depreciating  at  5%  a  year  as  compared  with 
other  things. 

If  we  have  really  embarked  upon  a  course  of 
steadily  increasing  prices,  as  is  predicted  by  many, 
the  underlying  economic  forces  are  surely  going  to 
work  toward  higher  interest  rates  than  would  other- 
wise have  obtained.  Not  as  the  result  of  the  con- 
scious attempt  of  any  individual  or  any  attempt  of  any 
individual  or  any  number  of  individuals  to  offset  what 
they  perceive  to  be  a  steady  depreciation  of  the  mone- 
tary standard,  but  as  the  unconscious  working  out  of 
his  own  business  problems  by  each  business  man,  on 
the  one  hand,  and  by  money  lending  capitalists,  on  the 
other.  The  manufacturer  finds  that  with  rising  prices 
he  not  only  wants  to  borrow  more  money  but  can  pay 
higher  interest  therefor  and  still  increase  his  margin 
of  profit.  The  capitalist,  on  the  other  hand,  is  ap- 
proached by  an  unusually  large  and  promising  number 
of  opportunities  for  investment  bidding  against  each 
other  and  thus  increasing  the  interest  rates. 

In  view  of  all  the  considerations  which  have  been 
suggested,  it  does  not  seem  too  much  to  assert  that  the 
tendency  of  the  increased  production  of  gold,  if  it  shall 
continue  uninterruptedly  for  some  years,  will  unques- 
tionably be  in  the  direction  of  higher  interest  rates. 


ROBERT  GOODBODY 


More   Gold   Means   Higher    "Time"    Money 
and  Lower  Bond  Prices 

r>\-  Robert  Goodbodv 

npHE  problem  of  the  effect  of  a  change  in  the  value 
of  gold  as  expressed  in  labor  and  commodities  on 
the  rate  of  interest  has  attracted  much  attention  of 
late. 

Up  to  the  last  two  or  three  years  it  was  practically 
impossible  to  interest  business  men,  even  bankers,  in 
it,  and  what  thought  and  discussion  there  was  on  the 
subject  was  confined  to  university  professors  and 
scientific  economists.  The  ordinary  business  man, 
even  when  possessed  of  keen  intelligence  in  his  call- 
ing, argued  (and  often  still  argues),  about  as  follows: 
"Gold  is  money.  If,  because  of  more  gold,  gold  falls 
in  value,  money  falls,  and  therefore  the  rate  on  money 
(i.  e.,  interest)  falls,  too."  For  the  ordinary  man  is 
accustomed  to  use  the  expression  "money"  for  the 
rate  of  interest  on  money.  It  is  a  glaring  example  of 
the  fallacy  called  by  logicians  "ignoratio  elenchi,"  for 
the  word  money  is  used  in  two  entirely  different 
senses. 

Surely  any  reader  who  reflects  will  agree  with 
me  that  this  has  been  the  usual  process  of  thinking 
which  has  prevailed  in  the  business  community.  In 
reality  the  very  opposite  is  true,  for  it  is  when  gold, 

163 


164  GOLD  SUPPLY  AND  PROSPERITY 

the  money  standard  of  the  civiHzed  world,  is  rising  in 
value  that  interest  rates  are  low,  and  when,  through 
increasing  production,  gold  is  becoming  more  plenti- 
ful, interest  rates  tend  to  rise.  It  is  more  accurate  to 
say  that  when  the  cost  of  producing  gold  is  falling, 
gold  falls  in  value  and  prices  of  commodities  and  labor 
tend  to  rise,  but  there  is  little  difference  in  the  two 
statements,  because  the  cheaper  gold  can  be  got,  the 
larger  the  quantity  produced,  now  that  the  great  pro- 
portion of  gold  comes,  not  so  much  from  placer  mines 
or  from  very  rich  deposits,  but  from  low  grade  mines, 
where  the  gold-bearing  strata  are  of  very  large  extent. 

The  world  is  no  richer  for  this  production  of  gold 
to  be  used  as  money.  Such  gold  cannot  be  eaten  or 
used  in  the  arts.  What  cheaper  production  of  gold 
does  do  is  to  raise  the  prices  of  commodities  and  labor, 
and  therefore  diminish  the  value  of  fixed  incomes.  It 
adds  nothing  to  the  comfort  of  the  world  as  a  whole, 
but  it  does  transfer  property  from  the  great  majority 
of  workers  to  those  who  buy  commodities  and  equities 
on  speculation.  Thus  it  tends  to  foster  speculation, 
and  therefore  to  quite  an  appreciable  extent  diverts 
capital  and  effort  from  channels  which  are  more,  to 
those  less  useful  to  mankind. 

What  happened  in  the  Rand,  now  the  largest  field 
of  gold  production?  A  very  large  amount  of  European 
capital  went  there  first  to  buy  from  a  few  fortunate 
individuals,  and  then  to  build  machinery  and  open  the 
mines.  No  doubt  the  part  used  to  buy  the  property 
before  development  was  in  reality  an  exchange  of 
capital  from  one  set  of  people  to  another,  but  the  part 


MORE  GOLD  MEANS  HIGHER  "TIME"  MONEY  165 

spent  in  development  was  as  clear  a  case  of  waste  of 
real  capital  as  if  it  had  been  spent  on  war  material  or 
on  deer  parks. 

I  am  inclined  to  think  that  the  dull  trade  which 
England  and  France  have  complained  of  during  the 
last  few  years  was  due  to  this  cause ;  of  course,  greatly 
aggravated  in  the  case  of  England  by  the  expenditure 
on  the  war  in  South  Africa,  which  war  itself  was 
brought  on  by  the  discovery  of  gold  in  the  Transvaal. 
Indeed,  I  see  no  reason  to  doubt  that  if  this  waste  of 
capital  had  not  occurred,  trade  in  England  would  have 
been  as  active  as  it  has  been  in  America.  American 
capital  had  no  such  drain  to  bear,  and  hence  the  effect 
on  trade  of  the  natural  progress  of  the  industrial  arts 
had  here  free  play. 

As  to  the  effect  of  the  fall  in  value  of  gold  on 
interest,  I  think  it  can  be  mathematically  demonstrated 
that  when  a  fall  is  going  on  in  the  value  of  the  metal 
which  is  used  as  the  standard  of  value,  and  the  nominal 
prices  of  other  commodities  are  rising,  the  result  is 
that  the  rate  of  interest  on  time  money  tends  to  be 
higher  compared  with  that  on  money  lent  on  call ;  and 
conversely  it  follows  that  if  time  money  continues  to 
be  dearer  compared  with  call  money  than  seems  rea- 
sonable to  trained  men  of  business,  the  reason  is  that 
gold,  the  standard  of  value,  is  falling.  Without  any 
abstruse  mathematics,  this  can  be  seen  to  be  reason- 
able. Markets  tend  to  accommodate  themselves  to 
circumstances,  and  if  the  sum  of  money  which  is  being 
lent  for  a  period  will  at  the  end  of  that  period  buy  less 
commodities  than  when  it  was  lent,  it  is  only  natural 


166  GOLD  SUPPLY  AND  PROSPERITY 

that  a  higher  rate  of  interest  should  be  asked  by  the 
lender,  and  also  that  the  borrower  can  afford  to  pay  a 
higher  rate  than  if  neither  expected  the  rise  in  prices. 

Take  another  example.  When  the  owners  of  fixed 
incomes  find  that  they  can  buy  less  each  year  with 
their  income,  they  tend  to  become  dissatisfied,  and  to 
try  to  change  into  some  form  of  investment  which  will 
yield  more  interest  or  will  advance  when  gold  falls. 
Hence  there  arises  a  tendency  to  think  less  of  bonds 
or  mortgages,  except  at  a  higher  rate  of  interest  than 
satisfied  them  before.  Hence  we  would  expect  higher 
rates  on  mortgages,  and  that  when  bonds  fall  due  they 
could  only  be  renewed  on  less  advantageous  terms. 

Now  what  does  financial  history  tell  us?  When 
examining  it  we  must  remember  that  fluctuation  in  the 
money  standard  is  only  one  of  the  causes  that  effect 
the  nominal  rate  of  interest.  Other  obvious  ones  are 
political  troubles;  war,  with  its  waste  of  capital  and 
sense  of  insecurity;  a  reckless  use  of  paper  currency; 
and  high  prices  of  food,  due  to  bad  harvests.  I  would 
point  out  that  there  is  no  fact  more  clear  from  the 
Scotch  insurance  tables,  which  are  in  existence  for 
over  a  century,  than  that  cycles  of  years  of  high  prices 
of  wheat  were  marked  by  a  higher  rate  of  interest  on 
mortgages,  as  can  be  seen  by  consulting  McCullagh's 
Commercial  Dictionary.  But  higher  prices  for  wheat 
are  also  an  effect  of  a  fall  in  gold,  and  the  disadvan- 
tages of  fixed  incomes,  giving  their  owners  a  smaller 
command  of  the  necessaries  of  life,  are  equally  felt 
whether  the  cause  is  a  change  in  the  money  standard 
or  something  else.     The  fact  of  a  rise  in  the  rate  of 


MORE  GOLD  MEANS  HIGHER  "TIME"  MONEY  167 

interest,  being  a  characteristic  of  such  periods,  is  a  sup- 
port I  can  fairly  claim  for  my  theory.  There  is  some 
difficulty,  in  using  statistics,  in  separating  the  effect  of 
other  causes  than  a  change  in  the  value  of  gold. 
Again,  it  is  comparatively  useless  to  go  back  farther 
than  the  year  1850,  for  before  that  date  silver  was  the 
money  standard  in  many  important  centers  of  civiliza- 
tion. At  present  only  one  standard  exists,  and  silver 
is  a  commodity  which  rises  or  falls  as  gold  falls  or 
rises. 

The  great  gold  discoveries  in  California  about  the 
year  1848,  followed  by  those  in  Australia,  gave  a  suffi- 
cient production  of  gold  to  supply  the  civilized  world, 
and  curiously  the  contemporary  improvement  in  rapid 
communication  between  the  different  countries  by 
means  of  railroads  and  steamships  made  it  necessary 
that  the  old  practice  of  having  two  standards  should 
be  abandoned.  Therefore,  in  this  short  discussion  of 
the  subject,  I  shall  only  deal  with  facts  since  1850. 

What  does  the  table  on  pages  76-79  show? 

We  see  the  great  increase  in  gold  production  from 
1848  to  1855.  We  then  see  a  sudden  relative  decline 
until  about  1890,  and  since  then  another  great  in- 
crease. We  also  see  that  the  amount  of  gold  used 
in  the  arts  was  relatively  stable  all  through  the  period 
covered  by  the  table,  and  that,  therefore,  during  the 
past  ten  years  the  amount  of  gold  in  sight  (i.  e.,  in  the 
great  banks  and  in  circulation),  has  increased  at  a  rate 
unknown  before.  I  suppose  that  the  comparatively 
small  increase  of  consumption  of  gold  in  the  arts  dur- 
ing the  last  few  years,  when  the  world  has  consumed 


168  GOLD  SUPPLY  AND  PROSPERITY 

so  much  more  of  other  commodities,  is  due  to  a  change 
of  taste  in  ornaments;  that  is,  I  suppose  the  world  is 
getting  more  free  from  the  disposition  to  indulge  in 
barbaric  modes  of  ornament.  We  know  that  between 
1870  and  1890  there  was  a  marked  tendency  to  cease 
to  use  silver  as  a  money  metal.  Hence  there  was  what 
was  known  as  a  "scramble"  for  gold.  So  keen  was  this 
"scramble"  that  many  people  tried  to  persuade  the 
world  to  go  back  to  bimetalism;  but  the  practical  ob- 
jections were  too  great,  and  business  men  instinctively 
insisted  on  having  only  one  standard.  Therefore  prices 
of  commodities  and  rates  of  interest  fell  and  prices  of 
securities  bearing  a  fixed  rate  of  interest  rose.  This 
does  not  show  in  our  table  for  some  years  after  1873, 
because  the  table  is  compiled  from  American  (New 
York),  statistics,  and  our  currency  was  a  paper  one 
until  1876.  But  if  anyone  will  study  what  happened 
in  England,  where  there  was  no  government  paper 
money  to  inflate  prices  and  to  complicate  conditions, 
he  will  find  that  this  theory  held  substantially  well. 
The  table  does  show  a  rise  in  interest  rates  in 
New  York  after  1850,  until  it  attained  its  maximum  in 
1873.  During  the  earlier  years  the  increased  produc- 
tion of  gold  was  causing  this,  and  afterwards  the  infla- 
tion of  our  note  issues. 

With  our  return  to  a  gold  standard  the  table 
shows  the  fall  in  interest  rates  and  in  prices  of  com- 
modities which  theory  would  lead  us  to  expect.  In 
England  there  was  no  complication  due  to  a  depre- 
ciated currency  such  as  we  had  in  the  United  States. 
There  gold  was  the  sole  standard,  and  between  1870 


MORE  GOLD  MEANS  HIGHER  "TIME"  MONEY  169 

and  1890  gold  was  getting  scarcer.  The  result  was  a 
great  appreciation  in  Consols  and  in  gilt-edged  securi- 
ties yielding  fixed  rates  of  interest.  During  this  time, 
also,  the  rates  for  time  money  tended  to  be  as  low  as, 
or  even  often  lower  than,  those  for  call  money.  Since 
the  great  production  of  gold  of  the  last  ten  years  be- 
gan, this  has  all  changed.  It  may  be  said  that  the  fall 
in  "gilt-edged  '  securities  was  due  to  the  Boer  War — 
though  I  shall  give  what  seems  to  me  a  convincing 
instance  to  refute  this  view;  but  certainly  for  the  past 
ten  years  call  money  has  been  almost  invariably  much 
cheaper  compared  with  time  money  than  was  the  case 
between  1870  and  1895,  and  of  this  I  know  no  other 
explanation  than  that  it  was  due  to  the  falling  value 
of  the  standard  of  value  (gold).  Now  for  the  convinc- 
ing instance  referred  to  just  now.  England  has  had 
three  big  wars  since  1850,  viz. :  the  Crimean  war,  from 
1854  to  1856;  the  Indian  Mutiny  in  1857-8,  and  the 
Boer  war,  in  1899  to  1901.  We  are  now  nearly  five 
years  after  the  end  of  the  Boer  war,  and  Consols  have 
so  far  shown  no  real  sign  of  recovering,  as  they  did 
quickly  after  the  Crimean  war. 

In  1855  Consols  fluctuated  between  93^  and  86^, 
in  1857  between  9A%  and  86V2.  In  other  words,  even 
the  shock  of  the  Indian  Mutiny,  the  great  bank  fail- 
ures in  England  and  America,  and  the  suspension  of 
the  Bank  Act,  did  not  depress  Consols  within  a  single 
year  of  the  end  of  the  Crimean  War  to  the  low  point 
of  1885.  In  1858  Consols  fluctuated  between  93^  and 
983^,  and  this  in  a  year  during  which  the  Indian 
Mutiny  existed.     Note  farther  that  in  1857  the  Bank 


170  GOLD  SUPPLY  AND  PROSPERITY 

of  England  rate  of  discount  was  as  high  as  10% ;  and 
in  1858  it  was  as  high  as  8%. 

I  have  stated  that  stocks  which  bear  a  fixed  rate 
of  interest  are  the  extreme  case  of  "time"  money,  and, 
of  course,  the  rates  for  call  money  in  London  can  be 
stated  approximately  from  the  Bank  of  England  rate. 
The  Consol  market  since  the  end  of  the  Boer  war  has 
shown  no  such  recovery,  though  it  has  been  exposed 
to  no  such  shocks  as  the  Consol  market  in  1857-8.  It 
seems,  then,  to  be  clear  that  some  force  in  1857-8  was 
making  time  money  cheap  compared  with  call  money, 
which  is  not  acting  today.  What  can  we  discover 
from  our  table  of  gold  production?  We  find  that  pro- 
duction began  to  fall  off  after  1855.  The  rich  placer 
deposits  of  California  and  Australia  becoming  less 
productive.  In  other  words,  gold  was  rising  in  value 
in  1857-8,  and  therefore  time  money  was  falling  in 
value  as  compared  with  call  money. 

I  am  prepared,  if  it  were  necessary,  to  go  through 
the  whole  period  from  1855  to  1892,  and  show  that  this 
feature  of  the  relative  value  of  time  to  call  money  was 
present.  Since  1895  an  opposite  state  of  affairs  has 
prevailed.  Gold  tends  to  fall  in  value,  and  we  have  a 
low  value  of  call  money  as  compared  with  time  money, 
and  therefore  an  apparent  inclination  of  English  Con- 
sols and  good  bonds  to  be  lower  in  price  than  would 
seem  natural  if  we  do  not  remember  this  cardinal 
underlying  fact. 


JOSEPH  F.  JOHNSON 

Dean  of  New  York  University  School  of  Commerce 


Influence  of  the   Increasing   Supply  on  Prices 
and  Interest  Rates 

By  Joseph  F.  Johnson,  Ph.  D. 

Professor  joseph  f.  johnson,  Dean  of  the 

New  York  University  School  of  Commerce,  as 
early  as  June,  1905,  when  he  addressed  the  Pennsyl- 
vania Bankers'  Convention,  called  the  attention  of  the 
country  to  the  very  great  importance  of  the  effects  of 
the  increasing  output  of  gold.  He  then  said  so  well 
what  he  had  to  say  upon  this  subject  that  he  thought 
it  unnecessary  to  restate  his  ideas  for  this  Symposium. 
Here  are  some  extracts  from  his  able  address: 

Gold  is  the  most  interesting  of  all  the  metals.  .  .  . 
Any  change  in  its  value  in  one  way  or  the  other  affects 
the  welfare  of  every  man  and  woman  in  the  civilized 
world.  .  .  .  Because  gold  is  used  as  the  standard 
of  prices  the  average  man  thinks  it  is  stable  in  value. 
All  other  things  may  rise  or  fall  in  value,  but  not  gold 
— that,  he  thinks,  is  immovable.  A  very  little  clear 
thinking,  however,  soon  convinces  one  that  with  re- 
spect to  its  value  or  exchange  power  gold  is  no  excep- 
tion among  the  metals.  Its  value  depends  upon  its 
abundance  in  relation  to  the  demand  for  it.  Any  great 
increase  in  its  supply  must  sooner  or  later  force  down 
its  value.  The  reason  why  the  average  man  fails  to  see 
this  truth  is  because  gold,  being  itself  the  standard  of 
prices,  has  no  price 

173 


174  GOLD  SUPPLY  AND  PROSPERITY 

During  the  first  fifty  years  of  the  Nineteenth  Cen- 
tury the  total  output  of  both  gold  and  silver  was  less 
than  two  billion  dollars,  while  the  output  of  gold  alone 
in  that  period  was  only  $800,000,000,  or  about  $16,- 
000,000  per  annum,  whereas  in  the  last  fourteen  years 
the  output  of  gold  has  amounted  to  nearly  three  and 
one-half  billion  dollars.  It  is  not  surprising  that  very 
grave  questions  arise  in  the  minds  of  thoughtful  men 
with  regard  to  the  probable  future  of  the  value  of  gold, 
and  with  regard  to  the  effect  upon  human  welfare, 
which  changes  in  the  amount  of  gold  will  exert.  Can 
the  world  absorb  $350,000,000  of  new  gold?— or  must 
its  value  fall  in  order  that  a  place  may  be  made  for  it 
in  the  markets?  If  its  value  does  fall  we  know  that 
prices  must  rise.  How  will  this  rise  of  prices  be 
brought  about?  Will  it  be  steady  and  gradual,  or  will 
it  be  sudden  and  spasmodic?  What  effect  will  it  have 
on  the  business  enterprises  of  men?  Will  it  lead  to 
speculation  and  panic?  Will  it  have  any  influence  on 
the  rate  of  interest?     .... 

Let  us  suppose  that  the  banking  reserves  of  the 
country  are  increased  $50,000,000  by  the  deposits  of 
these  miners.  Will  this  money  lie  idle  and  so  have  no 
effect  on  prices?  Certainly  not.  It  will  be  the  most 
potent  part  of  the  new  supply.  Bankers  are  the  last 
people  in  the  world  to  look  with  complaisance  upon  a 
hoard  of  idle  money.  Their  dividends  depend  upon 
their  power  to  make  a  dollar  do  twofold  or  fourfold 
work.  The  banks  that  receive  this  $50,000,000  of  new 
money  will  not  rest  till  they  have  found  borrowers, 
even  though  they  are  obliged  to  lower  their  rate  of 


INFLUENCE  ON  PRICES  AND  INTEREST       175 

discount.  This  $50,000,000  may  be  made  the  basis  for 
an  expansion  of  bank  credit  to  the  amount  of  $200,- 
000,000  or  even  $300,000,000,  and  the  borrowers  of  this 
credit  will  buy  goods  and  labor.  Thus  this  new  gold, 
in  the  form  of  currency  or  credit,  will  sooner  or  later 
increase  the  demand  for  various  goods  and  so  cause 

their  prices  to  rise 

An  increase  in  the  volume  of  gold  affects  first  the 
prices  of  stocks  and  bonds,  for  these  are  the  articles 
that  are  bought  by  the  men  into  whose  hands  the 
money  first  naturally  comes.  The  prices  of  such  specu- 
lative commodities  as  wheat,  cotton,  corn,  steel,  etc., 
are  affected  almost  as  quickly ;  not  the  prices  of  all  at 

the  same  time,  but  first  one,  then  another 

A  study  of  the  course  of  prices  during  the  last  few 
years,  when  the  general  level  has  been  lifted  some  25% 
by  the  great  increase  in  the  world's  supply  of  gold,  will 
show  that  some  articles  have  doubled  in  price,  that 
others  have  made  only  slight  advance,  and  that  still 
others  have  not  changed  at  all;  that  wages  in  some 
occupations  have  advanced,  and  that  in  others  the  old 

rates  are  still  paid 

Business  men  usually  think  of  the  rate  of  interest 
as  determined  entirely  by  the  money  situation.  They 
assume  that  a  high  rate  indicates  a  need  of  more  money 
and  that  a  low  rate  is  due  to  a  plethora  of  money.  We 
have  here  a  confusion  of  money  with  capital  which  has 
led  to  mischievous  legislation  in  the  past  and  is  today 
the  basis  of  worthless  remedies  proposed  for  the  relief 

of  the  money  market 

It  is  clear  enough  that  a  large  increase  of  gold 
supply,  such   as  that  imagined  a  few  moments  ago, 


176  GOLD  SUPPLY  AND  PROSPERITY 

must  cause  a  temporary  decline  in  the  bank  rate  of  dis- 
count. Apparently  it  increases  the  lending  power  of 
banks.  I  say  apparently,  for,  mind  you,  it  does  not  in 
any  way  increase  the  real  capital  of  the  country.  The 
final  result  will  be  a  rise  of  prices,  and  a  fall  in  real 
purchasing  power  of  the  dollars  which  are  loaned  by 
bankers.  The  first  effect  of  an  increasing  gold  supply 
— namely,  a  decline  in  the  rate  of  interest, — will  be 
only  temporary  if  the  supply  of  gold  continues  to  in- 
crease so  that  prices  preserve  an  upward  tendency ;  for 
forces  soon  get  to  work  that  tend  to  lift  the  rate  of 
interest  above  the  normal.  The  uneven  uplift  of  prices 
has  a  remarkable  psychological  effect.  Few  men  sus- 
pect that  their  ability  to  sell  goods  at  high  prices  is  in 
any  way  due  to  an  increase  in  the  gold  supply.  To  the 
business  man  a  dollar  is  a  dollar;  he  measures  his  pros- 
perity in  dollars;  if  the  number  of  dollars  into  which 
he  can  convert  his  property  is  increasing,  he  takes  it 
for  granted  that  his  wealth  is  increasing  at  the  same 
pace.  As  a  result,  therefore,  of  a  steady  consequent 
increase  of  what  may  be  called  the  "money  profits"  of 
business  and  industry,  men  in  business  are  eager  to 
extend  their  operations.  Newcomers  rush  into  indus- 
try and  business  from  the  professional  and  other  fields. 
Lawyers  turn  promoters  for  the  development  of  oil 
fields  or  for  the  construction  of  street  railways.  Teach- 
ers and  physicians  abandon  their  callings  and  study 
the  A  B  C  of  Wall  Street.  Preachers  dabble  in  real 
estate  or  take  up  the  schemes  of  eager  and  confident 
inventors. 


INFLUENCE  ON  PRICES  AND  INTEREST       177 

All  this  rush  into  the  industrial  field  must  evi- 
dently be  accompanied  by  an  increased  demand  for 
capital,  and  bankers  who  are  also  affected  by  the  con- 
tagion of  the  time  find  that  they  can  extend  their  credit 
to  the  utmost  limit  at  an  unusually  high  rate  of  inter- 
est. In  other  words,  the  increase  in  money  profits 
brought  about  by  the  maladjustment  of  prices,  arouses 
an  artificial  demand  for  capital  and  so  lifts  the  rate  of 
interest  above  its  normal  level,  or  that  which  would 
have  held  if  prices  had  not  been  disturbed 

All  this  expansion  of  credit  and  abnormal  demand 
for  capital  are  usually  attended  by  a  confident  popular 
belief  that  at  last  a  period  of  good  times  has  arrived 
which  can  have  no  end.  Wild  speculation  ensues  in 
this  or  that  commodity — in  real  estate,  in  railroad 
stocks,  in  wheat,  in  cotton — and  numerous  enterprises 
are  undertaken  far  in  excess  of  the  immediate  de- 
mand  

If  the  money  supply  continues  steadily  to  increase 
the  time  will  soon  come  again  when  men,  tempted  by 
the  low  rate  of  interest  and  by  restored  confidence  in 
the  country's  resources,  will  once  more  make  the  round 
of  borrowing  and  producing.  In  the  meantime  a  new 
generation  comes  upon  the  field,  lacking  the  experience 
of  its  elders,  again  new  enterprises  are  floated,  and  the 
cycle  of  unwise  production,  speculation  and  panic  is 
repeated 

Both  reason  and  experience  unite  in  leading  us  to 
expect  that  the  end  of  the  Japanese  and  Russian  war 
will  be  followed  by  a  release  of  credit,  another  upshoot 
of  prices  and  a  demand  for  capital  that  will  bring  large 
dividends  to  bankers  all  over  the   gold-using  world. 


178  GOLD  SUPPLY  AND  PROSPERITY 

How  and  when  this  next  period  of  prosperity  will  end 
depends  very  much  upon  the  power  of  bankers  to  re- 
main conservative  and  to  keep  their  heads. 

I  am  aware  that  what  I  have  said  is  in  opposition 
to  the  common  view  upon  the  subject.  It  is  usually 
taken  for  granted  that  the  present  outpour  of  gold  is 
going  to  result  in  the  decline  of  the  rate  of  interest. 
This  view,  I  am  certain,  is  a  mistaken  one.  It  rests 
upon  a  superficial  view  of  the  facts.  Had  we  the  time  I 
would  undertake  to  show  that  a  decrease  in  the  gold 
supply  or  in  the  money  supply,  such  as  this  country 
endured  between  1810  and  1840,  must  tend  to  keep  the 
rate  of  interest  below  the  normal 

Will  the  gold  supply  of  the  world  continue  to  in- 
crease at  the  present  unprecedented  rate?  Is  the  pro- 
duction to  be  $400,000,000  in  1905,  $450,000,000  in  1906 
and  a  half  a  billion  in  1907?  If  such  a  deluge  of  gold 
awaits  us  it  is  impossible  to  escape  the  conclusion  that 
the  purchasing  power  of  gold  must  suffer  a  great  de- 
cline and  the  civilized  world  pass  through  an  era  of 
wild  speculation  in  the  stocks  of  corporations  and  in 
the  prices  of  commodities.  Fortunately  there  are  some 
good  reasons  for  hoping  that  no  such  future  is  in  store 
for  us.  Gold  mining  is  an  industry  in  all  essential  re- 
spects like  other  industries.  Its  output  tends  to  in- 
crease when  the  value  of  the  product  is  rising,  and  to 
decline  when  the  value  of  the  product  is  falling 

The  gold  miner  is  more  interested  in  prices, 
though  not  consciously,  than  any  other  producer.  He 
is  interested  in  all  prices,  for  the  value  of  his  product 
varies  with  every  change  in  the  prices  of  goods  in 
general. 


JAMES  R.  BRANCH 

Secretary  American  Bankers"  Association 


Gold  and  Prosperity 

By  James  R.  Branch 

T    AM   firmly   of   the   opinion   that  the   effect   of  the 
rapidly  increasing  gold  supply  of  the  world,  which 
for  some  years  has  been  added  to  constantly,  owing  to 
the  new  gold  fields  which  have  been  discovered  from 
time  to  time,  will  increase  the  prices  of  commodities, 
wages  and  earnings ;  decreasing  interest  because  there 
is  more  money  to  loan.    For  the  same  reason  the  price 
of  securities  will  open  up  new  industries  and  advance 
the    earning    capacity    of    those    already    established. 
What  its  influence  on  business  ethics  will  be  is  hard 
to  determine ;  but  if  it  should  eventually  do  away  with 
the  payment  of  interest  on  deposits  subject  to  check  in 
banks  and  trust  companies,  I  think  much  good  will  be 
accomplished.     There  is  evidently  an  increase  all  over 
the  world  of  a  socialistic  feeHng,  owing  to  the  enor- 
mous fortunes  accumulated  by  the  few  and  the  dis- 
tress and  poverty  experienced  by  the  many.     If  the 
gold  supply  increases  rapidly  enough  to  supply  em- 
ployment for  more  workers   and  at  better  wages,   it 
would  possibly  retard  or  stop  this  increasing  feeling 
of  unrest  and  discontent   on  the   part   of  the  poorer 
classes,  and  thus  have  its  effect  on  politics  and  soci- 
ety.    Owing  to  the  fact,  however,  that  the  prices  of 
commodities  and  necessities  of  life  are  apt  to  advance 

181 


182  GOLD  SUPPLY  AND  PROSPERITY 

in  proportion  to  any  increase  of  wages,  I  fear  that  the 
wages  of  the  wage  earner,  although  larger  in  amount, 
will  have  little,  if  any  more  purchasing  power  than 
those  they  have  today. 

If  laws  were  adopted  preventing  more  than  one 
million,  or  even  five  million,  dollars  being  left  by  will 
or  otherwise  to  any  one  individual,  the  balance  to  go 
to  the  State  or  government,  much  would  be  accom- 
plished for  distributing  unnecessary  enormous  accum- 
ulated fortunes,  and  possibly  a  preventive  established 
for  troubles  which  appear  to  be  arising  over  the 
horizon. 


GEORGE  H.  SHIBLEY 


President  Bureau  of  Economic  Research 


The  Gold  Problem  Solved 

By  George  H.  Shibley 

\^7"HAT  is  the  probable  course  of  monetary  legisla- 
^^  tion  of  the  United  States?  This  question  is 
timely  for  not  only  is  there  a  growing  output  of  gold, 
but  a  concurrent  inflation  of  bank  currency,  due  to 
legislation,  accompanied  with  a  proposal  from  high 
sources  that  legislation  at  the  coming  session  of  Con- 
gress shall  increase  the  output  of  paper  money. 

The  extent  of  the  total  inflation  already  affected 
is  from  $21.42  per  capita  in  1896  to  $31.40  September  1, 
this  year — 46^%.  All  this  in  nine  years!  More  than 
5%  yearly.  About  a  billion  dollars,  or  more  than  twice 
as  much  as  would  have  resulted  from  free  silver.  And 
of  this  increase  nearly  one-fourth  has  been  caused  by 
currency  inflation,  due  to  the  Act  of  March,  1900. 

While  this  paper  money  inflation  has  been  taking 
place  an  opposing  tendency  and  one  that  is  making 
toward  stability  in  the  future  standard  of  value,  has 
been  taking  place.  The  ideal  standard  of  value,  ac- 
cording to  the  leading  economists,  is  the  multiple 
standard — the  maintenance  of  such  a  volume  of  money 
in  use  that  the  general  level  of  prices  of  products 
at   wholesale   will   be   kept   practically   stable."      And 


*Some  of  the  reasons  why  the  prices  of  commodities  are  taken  in 
measurements  of  the  price  level  are:  (1)  They  include  wages  and  rent 
as  well  as  the  other  factors  in  production,  (2)  These  factors  are  th« 
bases  of  most  business  contracts.  (3)  Debtors  when  repaying  loans 
should  receive  the  benefits  of  improved  methods  of  production,   for  dur- 

185 


186  GOLD  SUPPLY  AND  PROSPERITY 

government  regulations  and  laws  are  rapidly  ap- 
proaching this  ideal,  as  is  demonstrated  by  the  follow- 
ing data : 

From  small  beginnings,  some  fifteen  years  ago, 
the  United  States  Government  has  advanced  to  where 
it  is  measuring,  each  month,  the  general  level  of  prices 
of  products  at  wholesale.  It  began  with  the  Aldrich 
Report  on  Wholesale  Prices  and  Wages,  1893,  since 
which  time  the  scope  of  the  work  has  been  enlarged. 
During  1901  the  Industrial  Commission  included  in  its 
report  the  price-level  measurement  by  the  Bureau  of 
Economic  Research,  made  during  1889-1900;  and 
shortly  afterward  the  U.  S.  Bureau  of  Labor  began  the 
compilation  and  regular  publication  of  an  index  num- 
ber of  general  prices.  Another  department,  that  of  the 
Treasury,  is  issuing  regularly  the  changes  in  the  per 
capita  of  money  in  circulation. 

Thus  the  United  States  government  has  taken  the 
preliminary  steps  toward  the  establishment  of  the 
multiple  standard.  General  prices  are  being  measured, 
likewise  the  changes  in  the  volume  of  money  in  circu- 
lation, a  factor  in  determining  the  general  level  of 
prices  and  a  factor  that  can  be  controlled  absolutely  by 
the  laws  of  Congress,  thereby  controlling  the  price 
level.  All  that  now  is  required  for  the  complete  estab- 
lishment of  the  multiple  standard  is  a  law  abolishing 
the  Secretary  of  the  Treasury's  discretionary  power  as 
to  the  volume  of  money  in  use,  substituting  definite 


ing:  the  years  the  debts  have  existed  the  creditors  have  possessed  the 
right  to  use  the  improved  processes.  (4)  A  falling  price  level  for  com- 
modities tends  to  industrial  depression.  There  is  a  voluminous  literature 
on  the  measurement  of  price  levels ;  see  references  in  Quarterly  Bul- 
letin, Bureau  of  Economic  Research,  July,  1900 ;  also  The  Money  Ques- 
tion, pages  27-59,  by  the  writer. 


THE  GOLD  PROBLEM  SOLVED       187 

rules;  also  provision  that  the  volumes  of  currency  to 
be  issued  by  the  national  banks  shall  be  such  as  shall 
maintain  a  stable  price  level. 

This  ideal  is  almost  met  by  the  declaration  in  the 
Republican  national  platform  of  1900,  which  says: 
"We  favor  such  monetary  legislation  as  will  enable 
the  varying  needs  of  the  season  and  of  all  sections  to 
be  promptly  met,  in  order  that  trade  may  be  evenly 
sustained,  labor  steadily  employed,  and  commerce  en- 
larged." 

Here  the  implication  is  that  the  stability  in  the 
price  level  is  the  ideal.  All  who  publicly  discuss  the 
standard  of  value  admit  that  stability  of  this  character 
should  be  the  aim,  but  certain  selfish  interests  are 
seemingly  benefited  by  a  fluctuating  standard. 

Let  us  turn  to  the  proposal  to  abolish  the  discre- 
tionary power  of  the  Secretary  of  the  Treasury,  a  plan 
which  has  met  with  widespread  approval  whenever  he 
has  announced  that  the  government  will  relieve  a  tight 
money  market  or  will  cause  a  tight  one.  The  follow- 
ing is  from  an  article  on  "Government  Deposits  in 
Bank,"  in  the  March  Forum,  1900,  by  Director  of  the 
Mint,  George  E.  Roberts: 

"Obviously  it  would  be  desirable  to  secure  such 
definite  rules  for  the  management  of  the  Treasury  as 
would  relieve  the  Secretary  from  the  necessity  of  doing 
something  that  experience  has  shown  cannot  be  done 
without  subjecting  him  to  unmerited  criticism." 

Isn't  it  likely  that  this  idea  will  grow?  Also  the 
idea  that  the  volume  of  paper  currency  that  is  used  in 
connection  with  standard  money  should  be  gauged  to 


188  GOLD  SUPPLY  AND  PROSPERITY 

meet  the  wants  of  commerce?  that  is  to  say,  should 
not  the  volume  of  paper  currency  be  such  as  to  main- 
tain a  stable  price  level?* 

In  arriving  at  an  answer  several  points  should  be 
borne  in  mind — 

First,  that  the  great  countries  of  the  world,  except 
the  United  States,  do  maintain  a  stable  money  market 
and  stable  price  level,  except  as  interfered  with 
through  the  maintenance  of  a  practically  fixed  volume 
of  gold  within  the  country  as  a  weapon  of  war  as  well 
as  a  monetary  instrument.  In  England  this  is  accom- 
plished through  the  Bank  of  England,  which  is  gov- 
erned by  leading  merchants  and  therefore  in  the  inter- 
ests of  a  stable  money  market  and  stable  price  level. 
No  banker  can  become  a  member  of  the  governing 
power  of  the  Bank  of  England.  (See  Bagehot's  "Lom- 
bard Street.")      In  Germany  the  maintenance  of  sta- 


*It  is  possible  and  practicable  for  congress  to  control  the  volume  of 
paper  currency  so  as  to  maintain  a  practically  stable  price  level — a 
practically  stable  average  for  the  prices  of  leading  products  at  whole- 
sale. The  measurement  is  practicable  for  the  government  is  doing  it 
monthly,  as  is  pointed  out  above,  And  the  volume  of  national  bank  cur- 
rency (a  legal  tender  between  national  banks),  is  a  factor  in  deter- 
mining the  price  level,  and  is  controlled  by  the  laws  of  congress.  This 
is  impliedly  admitted  whenever  there  is  a  discussion  as  to  the  effect  of 
changes  in  the  volume  of  bank-note  circulation.  It  follows  that  con- 
gress can  keep  the  price  level  practically  stable  if  it  provides  that 
whenever  the  demand  for  money  increases  so  as  to  tend  to  raise  the 
price  level  it  shall  promptly  be  met  by  the  issuance  of  paper  currency, 
and  that  whenever  the  demand  slackens  there  shall  be  a  withdrawal  of 
currency.  Under  such  a  system  if  the  volume  of  gold  coins  should  in- 
crease faster  than  the  demand  for  it  there  would  be  a  permanent  retire- 
ment of  considerable  portions  of  the  paper  money.  The  primary  gauge 
in  maintaining  a  practically  stable  price  level  would  be  the  interest 
rate  on  call  money,  i,  e,,  the  volume  of  money  outside  the  treasury 
vaults  would  be  so  gauged  as  to  maintain  such  a  bank  rate  as  would 
be  required  to  produce  the  desired  height  of  price  level.  This  general 
policy  is  pursued  in  Germany,  France  and  other  continental  countries. 
In  France,  for  example,  the  volume  of  paper  currency  on  January  first 
each  year  issued  by  the  Bank  of  France  is  200  to  300  million  francs 
greater  than  for  the  preceding  month  and  usually  it  is  soon  retired. 
(Financial  Tables,  TJ,  S,  Monthly  Summary,  Treasury  Department). 


THE  GOLD  PROBLEM  SOLVED       189 

bility  is  through  the  Bank  of  Germany,  controlled  by 
the  imperial  chancellor — the  government ;  in  France, 
through  the  Bank  of  France,  controlled  by  a  joint  com- 
mittee from  the  government  and  from  the  merchants. 
The  supply  of  paper  currency  is  carefully  guarded,  for 
it  is  a  factor  in  determining  the  price  level. 

Secondly,  the  United  States  should  provide  a  sys- 
tem that  will  result  in  the  greatest  possible  stability. 
To  accomplish  this  the  great  speculative  banks  must 
be  deprived  of  their  power  over  the  price  of  call  money 
as  is  the  case  in  England,  Germany,  France,  Austria, 
Japan  and  other  countries.  This  can  be  accomplished 
by  a  law  of  congress  declaring  for  stability  in  the  money 
market  and  price  level  and  establishing  the  necessary 
machinery  for  accomplishing  the  desired  result.  Owing 
to  the  increasing  import  of  gold  it  will  probably  be 
necessary  to  secure  international  co-operation  for 
gradually  retiring  the  paper  curency. 

Thirdly,  the  benefits  to  be  derived  from  a  practi- 
cally stable  money  market  and  practically  stable  price 
level  are  inestimable : — 

(1)  It  would  banish  the  great  industrial  depres- 
sions, for  they  have  always  followed  a  falling  price 
level.  The  maintenance  of  a  stable  price  level  would 
alter  conditions. 

(2)  A  general  panic  for  money  could  not  occur. 
This  would  greatly  benefit  the  banking  capital  of  the 
country,  as  well  as  other  interests. 

(3)  Business  would  be  brisk  year  after  year; 
therefore,  the  general  average  of  interest  rates  would 
be  higher  than  under  a  fluctuating  price  level. 


190  GOLD  SUPPLY  AND  PROSPERITY 

(4)  The  amount  of  bank  reserves  would  be  re- 
duced, for  banks  possessing  salable  securities  would 
be  able  to  get  all  the  ready  money  needed  at  an  hour's 
notice. 

(5)  Monopoly  prices  for  particular  articles  would 
be  maintained  with  less  friction. 

(6)  With  industrial  depressions  banished  there 
would  be  a  lessening  of  antagonism  between  nations, 
for  each  depression  causes  the  several  nations  to  enact 
laws  against  each  other  in  the  vain  hope  of  bettering 
their  own  conditions. 

(7)  With  trade  antagonisms  considerably  re- 
moved the  path  to  international  arbitration  and  inter- 
national law  making  will  be  smoother,  thus  helping 
to  establish  the  time  "[When]  the  war  drum  [throbs] 
no  longer  and  the  battle  flags  [are]  furled  in  the  par- 
liament of  man,  the  federation  of  the  world !" 

Such  an  outline  is  one  view  as  to  the  probable 
courses  of  monetary  legislation. 


CONCLUSION. 


Conclusion. 

The  facts  and  arguments  presented  in  the  preced- 
ing pages  suggest,  if  they  do  not  establish,  the  follow- 
ing important  conclusions : 

1.  That  both  the  output  and  supply  of  gold  are 
likely  to  increase  rapidly  for  many  years. 

2.  That,  therefore,  the  value  of  gold  will  depre- 
ciate as  the  quantity  increases. 

3.  That  this  depreciation  will  be  measured  by  the 
rise  in  the  average  price  level. 

4.  That  a  rising  price  level,  if  long  continued,  is 
accompanied  by  rising  or  high  interest  rates. 

5.  That  high  interest  rates  mean  low  prices  for 
bonds  and  all  other  long-time  obligations  drawing  fixed 
rates  of  interest,  dividends  or  income. 

6.  Rising  prices  increase  the  cost  of  materials 
and  of  operation  and  tend  to  decrease  the  net  profits 
of  all  concerns  the  prices  of  whose  products  or  ser- 
vices either  cannot  be  advanced  at  all  or  are  not  free 
to  advance  rapidly, 

7.  Rising  prices  tend  to  increase  the  net  profits 
of  all  concerns  that  own  their  own  sources  of  materials 
and  supplies. 

8.  Rising  prices  of  commodities  tend  to  cause  the 
prices  of  all  tangible  property  to  rise.  This  includes 
lands,  mines,  forests,  buildings  and  improvements. 

193 


194  GOLD  SUPPLY  AND  PROSPERITY 

9.  Rising  prices  of  commodities  and  property 
tend  to  increase  the  values  of  the  securities  of  corpora- 
tions holding  commodities  or  property. 

10.  Rising  prices  and  cost  of  living  necessitate 
higher  money  wages,  though  the  rise  of  wages  will 
follow,  at  some  distance,  behind  the  rise  of  prices. 

11.  As  rising  prices  do  not  mean  increased  profits 
to  all  concerns,  many  employers  will  not  concede 
higher  wages  without  strikes. 

12.  Rising  prices  and  wages,  therefore,  mean 
dwindling  profits  and  troublous  times  in  many  indus- 
tries, with  complete  ruin  as  the  final  goal. 

13.  Because  wages  will  not  rise  as  fast  or  as  much 
as  prices  and  the  cost  of  living,  there  will  be  dissatis- 
faction and  unrest  among  wage  and  salary  earners. 

14.  Rising  prices  of  commodities  and  property 
encourage  speculation  in  commodities,  stocks  and  real 
estate  and  discourage  honest  industry. 

15.  Thus  rising  prices,  by  diminishing  the  in- 
comes of  "safe"  investments  in  "gilt-edged"  bonds  and 
stocks  and  by  increasing  the  profits  of  speculators,  en- 
courage extravagance,  recklessness  and  thriftlessness. 

16  As  rising  prices  decrease  the  purchasing 
power  of  debts,  and  thus  aid  debtors  at  the  expense  of 
creditors,  they  discourage  saving  and  thrift. 

17.  Rising  prices,  then,  by  promoting  speculation 
and  extravagance,  increase  consumption,  especially  of 
luxuries,  and,  therefore,  stimulates  production. 

18.  Rising  prices,  then,  result  in  what  is  real 
prosperity  for  many  industries  but  what  is,  for  a  nation 


CONCLUSION  195 

as  a  whole,  artificial  or  sham  prosperity — the  result  of 
marking  up  prices  rather  than  of  increasing  produc- 
tion. 

19.  With  prices,  wages,  rates  and  industries  al- 
ways imperfectly  adjusted  to  the  ever  depreciating 
value  of  gold  and  with  instability  and  uncertainty 
throughout  the  financial  world,  there  cannot  but  be  a 
great  shifting  around  of  values  and  of  titles  to  prop- 
erty. 

20.  As  this  shifting  is  to  the  advantage  of  the 
debtors — the  rich — and  to  the  disadvantage  of  the 
creditors — the  great  middle  class — it  results  in  rapidly 
concentrating  wealth  in  the  hands  of  a  comparatively 
few. 

21.  For  all  of  these  reasons  a  prolonged  period 
of  rapidly  rising  prices  is  reasonably  certain  to  become 
a  period  of  unrest,  discontent,  agitation,  strikes,  riots, 
rebellions  and  wars. 

22.  A  rapidly  depreciating  standard  of  value, 
then,  if  long  continued,  not  only  produces  most  im- 
portant  results   in  the   financial,   industrial   and   com- 

V      mercial  world,  but  is  likely  to  result  in  changes  of  great 
consequence    in    the    political,    social    and    religious 
vW   world. 

/J  In  view  of  all  the  facts,  results  and  possible  con- 

^     sequences  connected  with  the  increasing  output  and 

^     supply  of  gold,  "The_Wjall  Street. J[ournar'  was  right 

P^when,  on  December, -4.t  130^  it  said  that  "No  other 

J     economic  force  is  at  present  in  operation  in  the  world 

of  more  stupendous  power  than  that  of  gold  produc- 

tjiiji-" 


TN  substantiation  of  the  above  conclusions  a  few  facts, 
■*■  drawn  largely  from  the  articles  on  the  preceding 
pages,  will  be  cited  and  discussed  briefly : 

Gold  Production 

1.  Both  the  output  and  supply  of  gold  are  likely 
to  increase  for  many  years. 

While  the  future  output  of  gold  is,  of  necessity, 
unknown  and  uncertain,  there  is  great  unanimity  of 
opinion,  among  mining  experts,  on  this  point.  It  ap-' 
pears  to  be  generally  recognized  that,  during  the  last 
twenty  years,  the  industry  of  gold  mining,  or  rather  of 
gold  production,  has  been  established  on  a  very  differ- 
ent and  much  more  certain  basis  than  any  previously 
existing.  No  longer  is  the  output  of  gold  dependent 
mainly,  or  even  largely,  upon  placer  mining  and  the 
chance  finds  of  "free"  gold.  The  supply  of  gold,  in 
rock,  sand,  clay,  and  water,  being  inexhaustible,  it  is 
now  possible,  by  machinery  and  metallurgical  pro- 
cesses, to  extract  gold,  in  paying  quantities,  from  many 
forms  of  these  vast  storehouses.  To  such  an  extent  is 
this  true  that  the  future  supply  of  gold  is  even  more 
secure  than  is  that  of  coal,  iron,  lumber,  wheat  or 
cotton. 

Even  if  prospecting  were  to  stop  and  attention 
were  to  be  devoted  only  to  the  gold  mines  and  bodies 
already  discovered,  and  geologically  in  sight,  it  is  prob- 

196 


CONCLUSION  197 

able  that  the  output  of  gold  would  continue  to  increase 
for  many  years.  As  Mr  Selwyn-Brown,  a  gold  mining 
expert,  tells  us  in  his  very  interesting  article,  "as  the 
rich  surface  deposits  are  being  worked  out,  improve- 
ments in  mining  and  metallurgical  processes  are  en- 
abling poorer  and  poorer  deposits  to  be  worked."  That 
is,  improvements  in  "stamp  mills,"  cyanide  mills, 
dredging  machines  and  other  gold  extracting  apparatus 
and  processes  are  being  made  so  rapidly  that  it  is,  every 
year,  becoming  profitable  to  work  lower  and  lower 
grades  of  ore,  sand  and  earth.  As  the  grade  declines 
the  quantity  in  sight  increases  rapidly.  In  fact  there 
are  almost  literally  mountains  of  low  grade  gold  ore 
that  can  even  now  be  worked  profitably.  Some  of  the 
largest,  most  productive  and  most  profitable  mines  of 
today  contain  ore  averaging  less  than  $3  and,  in  some 
instances,  only  $2  of  gold  per  ton. 

The  supply  of  such  ore  being  inexhaustible  the 
output  depends  upon  the  number  and  size  of  the  mills 
employed  to  extract  the  gold.  It  is  reasonably  certain 
that,  for  years  to  come,  the  improvements  in  methods 
and  processes  of  mining  will  more  than  keep  pace  with 
both  the  decline  in  the  quality  of  the  ore  and  the  in- 
crease in  the  cost  of  mining  due  to  rising  prices  and 
wages,  occasioned  by  the  depreciation  of  gold. 

In  view  of  all  the  facts,  Mr.  Selwyn-Brown's  con- 
clusion that  "a  progressive  increase  each  year  may  con- 
fidently be  expected"  is  conservative.  This  conclusion, 
is  almost  a  certainty.  The  uncertainty  lies  in  the  pos- 
sibility, if  not  probability,  either  of  discovering  many 
important  new  mines  in  the  practically  unexplored 
parts  of  every  continent  or  of  making  improvements 


198  GOLD    SUPPLY    AND    PROSPERITY 

that  will  radically  reduce  the  cost  of  extracting  gold. 
In  either  case  the  increase  in  the  output  of  gold  might 
be  not  simply  arithmetically  but  geometrically  pro- 
gressive. 


The  Quantity  Theory  of  Money 

2  and  3.  The  value  of  gold  will  depreciate  as  the 
quantity  increases  and  this  depreciation  will  be  meas- 
ured by  the  rise  in  the  average  price  level. 

The  accuracy  of  these  conclusions  depends  upon 
the  validity  of  what  is  generally  known  as  the  quan- 
tity theory  of  money.  The  truthfulness  of  this  theory 
is  not  disproved  simply  because  prices  do  not  rise  in 
exact  proportion  to  the  increase  in  the  quantity  of  gold. 
That  is,  because  prices  do  not  exactly  double  every 
time  the  quantity  of  gold  is  doubled.  The  theory  must 
not  be  taken  too  literally.  NoTonTy  should  it  be  quali- 
fied, as  Mr.  Henry  Farquhar  suggests,  with  the  proviso 
"other  things  being  equal" — which  they  seldom  are — 
but  it  should  be  qualified  by  saying  that  the  theory  ap- 
plies as  well,  and  perhaps  better,  to  gold  than  to  most 
other  commodities. 

We  do  not  pretend  that  doubling  or  halving  the 
quantity  of  wheat,  cotton,  wool  or  iron,  produced  will 
exactly  halve  or  double  the  prices  of  these  commodi- 
ties. If,  beginning  in  1907,  two  grains  of  wheat  should 
grow  where  one  grew  before  we  may  be  sure  that  the 
future  price  of  wheat  (allowing  time  for  readjustment) 
would  not  be  just  half  what  it  is  today — that  is  40  cents 
instead  of  80  cents  a  bushel.  "Other  things"  would 
interfere. 


CONCLUSION  199 

A  radical  decline  in  the  price  of  wheat  would  cause 
much  more  of  it  and  much  less  of  other  grains  to  be 
consumed.  Wheat  at  60  cents  is,  perhaps,  cheaper  food 
for  hogs  and  horses  than  corn  at  50  cents  a  bushel. 
Hence,  the  cost  of  producing  corn  remaining  the  same, 
we  would  soon  be  raising  as  much  less  corn  as  we  were 
raising  more  wheat,  with  prices  at  50  and  60  cents  a 
bushel  respectively.  But  the  demand  for  corn  falling 
off,  prices  would  decline  somewhat.  Likewise,  assum- 
ing that  the  demand  for  wheat  would  more  than  double 
before  the  price  would  decline  50%  and  that,  therefore, 
the  profits  of  raising  wheat  would  increase,  the  price 
of  corn  lands  would  fall  while  those  of  wheat  lands 
would  rise, — the  one  tending  to  decrease  the  cost  of 
raising  corn  and  the  other  to  increase  the  cost  of  raising 
wheat. 

For  similar  reasons,  doubling  the  quantity  of  cot- 
ton, wool,  or  iron  would  not  result  in  halving  prices. 
New  uses  would  be  developed,  especially  for  wool  and 
iron,  that  would  prevent  prices  from  declining  the  full 
50%.  The  extent  to  which  the  price  of  any  commodity 
is  affected  by  a  change  in  the  supply  is  determined  by 
the  utility  of  the  commodity  and  by  the  possible  sub- 
stitutes for  it  at  various  prices. 

When,  however,  by  custom  or  decree,  we  make  any 
one  commodity  a  standard  of  value  for  testing  all  other 
commodities,  we  give  it  a  monopoly  of  this  use  or 
function;  we  give  it  the  exclusive  field,  make  substi- 
tutes impossible  and  make  its  utility  practically  infi- 
nite for  this  purpose,  regardless  of  price.  We  set  it 
off  against  all  other  commodities.  It,  and  it  alone,  oc- 
cupies one  end  of  the  exchange  transaction;  all  other 


200  GOLD    SUPPLY    AND    PROSPERITY 

commodities,  in  turn,  occupy  the  other  end.  We  do 
not  though,  when  we  make  one  commodity  the  stand- 
ard of  value,  give  this  commodity  a  value  equal  to  the 
value  of  all  other  commodities.  We  do  not  put  it  in 
one  end  of  the  scales  and  all  other  commodities  in  the 
other  end  and  say  that  its  value  must  equal  the  value  of 
all  other  commodities.  We  do  not.  for  a  moment,  as- 
sume that  the  bushel  measures  in  use  shall  be  sufficient 
in  number  to  equal  the  capacity  of  all  that  they  will 
measure.  A  bushel  is  simply  a  unit  of  measurement  of 
capacity.  Likewise  the  gold  dollar  is  simply  a  unit  of 
value  by  which  all  values  are  measured. 

The  values  of  all  other  commodities  are  deter- 
mined by  comparing  the  exchange  value  of  certain 
fixed  units  of  such  commodity  with  the  value  of  a  cer- 
tain fixed  unit  of  the  standard-of-value  commodity.  The 
result  of  this  comparison  is  called  "price."  Prjce  is 
simply  the  value  of  a  thing  in  money.  The  money  or 
standard  of  value  may  be  wampum,  a  beaver  skin,  a 
pound  of  tobacco,  37%  grains  of  silver,  or  23.22  grains 
of  gold.  Whatever  it  is,  it  measures  all  other  values. 
It  may  be  one  commodity  today  and  another  tomorrow. 
While  it  is  the  standard  it  fixes  the  values,  terms, 
prices,  of  all  else.  Its  value  becomes  the  supreme  test 
of  all  values. 

The  adjustment  is  not  always  complete  and  per- 
fect. The  commercial  world,  however,  is  always  busy. 
If  the  price  of  any  article  is  too  high,  that  is,  if  its  cost 
of  production  is  less  than  is  that  of  other  commodities 
for  which  it  exchanges,  economic  forces  are  set  at 
work  that  will  surely  result  in  increasing  the  quantity 
of  this  over-estimated  commodity.    Soon  the  supply  of 


CONCLUSION  201 

this  article  will  be  greater  than  the  demand,  at  the  high 
price,  and  the  price  will  decline  to,  and  perhaps  below, 
its  normal  price,  as  compared  with  other  commodities. 
This  adjusting  force  is  always  at  work  on  all  commodi- 
ties. 
{H^rh;.  The  cost  of  production  is  the  magnetic  value  pole 

„  \. '        that  attracts  all  price  needles.    While  price  needles  are 
I  swinging  back  and  forth,  in  short  or  long  swings,  past 

their  magnetic  poles,  the  most  of  them  are  substan- 
tially true  at  most  times.  The  law  of  demand  and  sup- 
ply— the  quantity  theory — is  the  adjusting  force,  the 
balance  wheel,  that  keeps  the  needle  always  pointing 
in  the  right  direction.  It  matters  but  little  how  many 
or  what  are  the  uses  of  any  commodity,  it  is  reasonably 
safe  to  conclude  that  its  price  is  fairly  well  adjusted  to 
its  cost  of  production,  if  a  considerable  period  of  time 
be  taken.  In  the  case  of  most  perishable  commodities, 
or  of  commodities  consumed  from  year  to  year,  the 
average  price  of  a  few  years  is  likely  to  be  very  close 
to  its  true  value,  that  is,  to  its  cost  of  production.  In 
the  case  of  imperishable  commodities,  and  particularly 
of  the  precious  metals  and  stones,  of  which  the  stock 
on  hand  is  very  great,  the  swing  of  the  price  needles 
is  slow  and  long  and  averages  must  be  taken  for 
several  decades,  if  they  are  to  be  a  true  guide  to  cost 
of  production.  In  any  case,  the  exchange  values  of 
commodities  capable  of  duplication  are  always  fluctu- 
ating around,  and  are  usually  near,  the  cost-of-produc- 
tion  points. 

A  rapid  increase  in  the  yearly  product  of  any  com- 
modity indicates  that  its  cost  of  production  is  below 
its  price.    If,  as  in  the  case  of  gold,  the  increase  con- 


202  GOLD    SUPPLY    AND    PROSPERITY 

tinues  for  twenty  years  and  at  an  accelerating  speed, 
it  is  probable  that  the  price  is  still  considerably  above 
the  cost  of  production  which  is,  perhaps,  shifting  rap- 
idly and  becoming  cheaper  and  cheaper.  The  output 
of  gold,  then,  is  now  increasing  rapidly  because  the 
profits  of  producing  it  are,  on  an  average,  greater  than 
are  the  average  profits  of  producing  other  things.  The 
equilibrium  will  be  restored  only  when  the  output  and 
supply  of  gold  are  sufficient  to  maintain  a  stable  price 
level. 

How  much  more  gold  will  be  required  and  how 
much  higher  average  prices  must  go,  before  the  adjust- 
ment is  perfected,  is  the  problem.  It  is  a  most  compli- 
cated one.  So  complicated  that  it  is,  perhaps,  not  pos- 
sible to  get  all  the  factors  together  into  a  mathematical 
formula.  Assuming  that  the  price  of  gold  is  now  25% 
too  high,  as  compared  with  the  relative  cost  of  produc- 
tion of  gold  and  of  all  other  commodities,  the  problem 
may  be  stated  as  follows : 

"How  much  will  the  existing  supply  of  gold  have 
to  be  increased  to  raise  the  average  price  level  25%?" 

Even  if  we  suppose  that  the  gold  used  for  other 
than  monetary  purposes  has  no  influence  upon  prices 
— which  is  not  entirely  true — and  that  the  relative  cost 
of  producing  gold  and  other  things  should  remain  un- 
changed, no  exact  answer  is  possible.  Human  nature 
constitutes  an  uncertain  factor.  An  allowance  must 
be  made  for  custom  and  habit  in  fixing  price  and  in 
preventing  a  quick  adjustment  of  values.  We  see  men 
everywhere  continuing  to  produce  things  at  a  loss. 
Farmers  keep  on  raising  corn,  or  v^rheat,  or  cotton  in 
sections  of  the  country  where  the  raising  of  these  pro- 


CONCLUSION  203 

ducts  has  ceased  to  be  profitable.  They  keep  no  books 
or  records  and  do  not  know  what  crops  are  profitable 
and  what  unprofitable.  Such  action,  or  inaction,  pro- 
longs the  adjustment  period  and  prevents  the  adjust- 
ment of  prices,  possibly  until  the  quantity  of  gold  has 
been  unduly  increased.  As  a  result  the  price  needle 
will,  perhaps,  swing  past  its  magnetic  pole  to  remain 
there  for  many  years. 

If  all  men  always  knew  their  own  interests  and 
promptly  adjusted  themselves  to  changing  conditions 
and  if  there  were  no  possible  connection  between  gold 
used  for  monetary  purposes  and  gold  used  in  the  arts, 
the  problem  would,  perhaps,  be  one  of  simple  propor- 
tion. Increasing  the  quantity  of  monetary  gold  25% 
would  then,  in  time,  increase  prices  257<>-  As  the  quan- 
tity of  gold  that  ever  recrosses  the  line  between  mone- 
tary gold  and  gold  in  the  arts  is  relatively  small  and 
is  not  likely  to  become  large  under  any  conditions  likely 
soon  to  exist,  and  as  the  uncertain  factors  of  human 
nature  are  usually  working  on  both  sides  of  the  equation 
at  the  same  time  and,  therefore,  largely  cancel  each 
other,  it  is  probable  that,  after  making  a  proper  and 
not  very  large  yearly  allowance  of  gold  to  offset  and 
prevent  the  natural  decline  in  prices,  due  to  improved 
methods  of  production,  we  can  conclude  that  prices,  in 
the  long  run,  increase  or  decrease  as  the  quantity  of 
monetary  gold  increases  or  decreases.  That  is,  the  law 
of  demand  and  supply  holds  good  when  applied  to 
monetary  gold.  This  means  that  the  quantity  theory 
of  money  (gold  being  considered  as  the  only  real 
money)  is  more  nearly  true  of  gold  than  of  almost  any 
other  commodity  that  could  be  used  as  money. 


204  GOLD    SUPPLY    AND    PROSPERITY 

This  statement  is  true  not  simply  because  gold  is 
the  standard  of  value  but  partly  because  there  is  virtu- 
ally an  unlimited  demand  for  any  imperishable  com- 
modity that  has  become  the  standard  of  value  of  the 
civilized  world.  With  other  commodities,  used  for 
other  than  monetary  purposes,  there  is  what  we  may 
call  a  saturation  point  which,  when  passed,  prices  de- 
cline rapidly.  Thus,  a  certain  per  capita  quantity  of 
sugar,  salt  or  pepper  will  satisfy  ordinary  needs  and 
command  a  fair  price.  Twice  these  amounts  would, 
perhaps,  reduce  prices  to  one-fourth  of  what  they  form- 
erly were.  It  is  because  of  this  fact  that  unusually  big 
crops  of  cotton,  wheat  or  peaches  sell  for  less  than 
smaller  crops  and  unusually  small  crops  are  often  more 
valuable  to  producers  than  are  average  crops. 

There  can  be  no  saturation  point  for  gold,  when  it 
is  the  standard  of  value;  no  point  where  the  supply 
satisfies  the  demand.  Before  the  saturation  point  is 
reached,  prices  rise  and  the  saturation  point  recedes. 
Like  the  bundle  of  oats  on  the  end  of  the  wagon  pole  in 
front  of  the  donkey,  the  demand  for  gold  always  out- 
runs the  supply.  An  increase  of  supply  results  in  in- 
creased prices.  With  higher  prices  more  gold  is 
needed  to  measure  goods  and  there  is  an  increased  de- 
mand that  will  still  further  increase  the  supply.  Again 
prices  will  rise  and  call  for  more  gold.  Thus  the  de- 
mand for  gold  grows  by  what  it  feeds  on  and  is  just  as 
great,  after  the  supply  has  doubled  or  quadrupled,  as 
it  was  before.  It  is,  in  fact,  greater,  because  it  is  ac- 
celerated by  the  artificial  demand  created  by  rising 
prices.  Besides,  prices  will,  at  times,  rise  even  faster 
and  farther  than  the  cost  of  gold  or  the  supply  on  hand 


CONCLUSION  205 

would  warrant;  just  as  land  values  run  ahead  of  in- 
creasing population. 

The  quantity  theory  of  money,  then,  is  substan- 
tially true  with  a  precious  metal  like  gold  as  a  standard 
of  value.  "Quantity,"  however,  is  only  an  incident,  a 
means  by  which  prices  are  adjusted  to  cost  of  produc- 
tion— the  most  important  factor  of  the  problem.  Be- 
fore there  can  be  a  supply  of  an  article  there  must  be  a 
demand  for  it  at  a  price  above  its  cost  of  production. 
First,  demand,  next  cost  and  then  production  and  sup- 
ply. Cost  is  the  fulcrum  with  demand  on  one  end  and 
supply  at  the  other  end  of  the  balance.  When  supply 
is  high  demand  will  be  low,  at  the  prices  prevailing, 
and  production  will  decline.  When  supply  is  low  de- 
mand will  be  high,  at  the  prices  prevailing,  and  produc- 
tion will  increase.  Cost  of  production,  then,  is  the 
most  important  factor  and  the  one  that  determines 
demand,  fixes  price  and  restricts  supply. 

This  kind  of  a  "quantity  theory"  is,  then,  in  real- 
ity, not  a  "quantity  theory  of  money"  at  all  but  a  "cost- 
of-production  theory  of  gold"  or  of  any  precious  metal 
used  primarily  as  a  standard  of  value.  This  theory  is 
not  deducted  from,  or  sanctioned  by,  any  one  or  all  of 
the  writers  of  the  symposium  in  this  book.  Nor  is  it 
accepted  by  many  economists.  It  is,  however,  not  out 
of  harmony  with  the  view  of  many  economists  and 
writers.    Thus  Ricardo  said; 

"Gold  and  silver,  like  all  other  commodities,  are 
valuable  only  in  proportion  to  the  quantity  of  labor 
necessary  to  produce  them  and  bring  them  to  market." 

Professor  Francis  A.  Walker  said: 

"No  one  has  ever  yet  seriously  undertaken  to  show 


206  GOLD    SUPPLY    AND    PROSPERITY 

what  determines  the  value  of  money — that  is,  prices — 
if  supply  and  demand  do  not." 

This  cost-of-production  theory  apparently  harmon- 
izes with  the  views  of  Mr.  E.  J.  Shriver  in  the  De- 
cember, 1906,  number  of  Moody's  Magazine.  Mr. 
Shriver  holds  that  "the  value  of  money,  like  that  of  any 
other  article,  cannot  but  depend  upon  the  amount  of 
effort  required  to  obtain  that  of  which  it  is  composed — 
in  other  words,  upon  its  labor  cost."  He  says  that  the 
universal  rise  in  prices  is  accounted  for  by  the  lower 
cost  of  production  of  gold.  Discussing  the  value  of 
money,  he  says : 

"The  value  could  never  be  regulated  by  the  quan- 
tity in  use,  so  long  as  the  same  amount  of  labor  exer- 
tion would  produce  fresh  supplies.  As  a  measure  of 
value  it  never  was  the  coined  or  printed  dollars  that 
counted;  it  was  always  the  material  that  entered  into 
them,  for  paper  dollars  have  had  value  only  for  what 
they  represented  in  metal  behind  them,  modified  or  dis- 
counted often  by  doubt  as  to  the  certainty  of  obtaining 
it.  As  a  medium  of  exchange,  the  tangible  dollars, 
whether  of  gold  or  silver  or  paper,  have  passed  out  of 
existence,  except  for  the  petty  transactions,  the  total 
number  and  value  of  which  are  too  small  for  the 
quantity  of  money  to  have  any  significance." 

Of  course,  by  labor  cost,  Mr.  Shriver  means  the 
total  cost  of  production,  capital  being  considered  but 
an  aid  to  labor.  That  cost  is  more  important  than 
quantity  is  evident.  Let  us  suppose  that,  in  1907,  new 
methods  of  producing  gold,  in  unlimited  qualities  and 
at  half  the  present  cost,  will  be  found.  Again  suppose 
that  production,  should  jump  to  $1,000,000,000,  in  1907, 


CONCLUSION  207 

and  to  $2,000,000,000,  in  1908.  Does  any  one  suppose 
that  prices  will  rise  only  about  10%,  in  1907,  and  20% 
in  1908 — the  per  cent,  that  would  be  added  to  the 
world's  gold  supply?  As  Mr.  Logan  suggests  in  his 
article,  would  not  the  world's  speculators  begin  to 
anticipate  coming  events  by  buying  up  all  kinds  of 
commodities  and  property  that  would  surely  appre- 
ciate in  value?  Would  they  not  deal  in  gold  futures 
just  as  they  now  deal  in  cotton  or  wheat  futures? 
Would  not  the  coming  crop  of  gold  depreciate  its  value 
just  as  the  coming  crop  of  wheat,  even  before  it  is  har- 
vested, depreciates  the  value  of  the  wheat  on  hand? 
Would  not,  then,  average  prices  rise  much  faster  than 
the  actual  quantity  of  gold  in  stock  would  warrant? 

Most  economists,  including  some  of  those  who  par- 
ticipated in  the  symposiums  in  this  book,  hold  substan- 
tially that  all  kinds  of  money  and  all  kinds  of  goods 
affect  prices,  but  that  the  money  in  circulation  and  the 
goods  in  exchange  have  more  effect  upon  prices  than 
have  other  money  and  other  goods. 

Mr.  Keeler,  Professor  Kemmerer  and  Professor 
Fisher  not  only  consider  the  volume  of  money  in  cir- 
culation— and  include  credit  currency  with  money — 
and  the  volume  of  goods  in  exchange,  but  they  make 
the  velocity  of  circulation  a  factor  in  the  problem. 
Professors  Fisher  and  Kemmerer  even  make  a  factor 
of  the  average  rate  of  exchange  of  commodities.  Mr. 
Muhleman  thinks  that  "rapidity  of  circulation  of 
money  and  rapidity  of  exchange  of  commodities  are 
indicators  of  the  status  of  the  demand"  and,  as  such, 
"they  probably  have  indirect  influence  upon  prices." 
Apparently,  however,  Professor  Fisher  lacks  confidence 


208  GOLD    SUPPLY    AND    PROSPERITY 

in  the  rapidity  of  circulation  theory  and  in  the  effect  of 
inferior  kinds  of  money  for  his  last  sentence  is : 

"In  short,  prices  in  gold  countries  depend  chiefly 
on  the  amount  of  business  and  the  amount  of  gold." 

Ex-Congressman  A.  J.  Warner,  although  he  thinks 
that  all  forms  of  money  that  do  the  work  of  gold  have 
the  same  effect  on  prices  as  gold,  ridicules  the  idea  that 
prices  are  affected  either  by  the  rapidity  of  circulation 
of  money  or  by  "the  rapidity  with  which  swapping  is 
done."  He  holds  strictly  to  the  quantity  theory  and 
says  that  "price  levels  are  determined  by  the  available 
supply  of  money,"  that  is,  by  the  relation  of  goods  to 
money. 

It  certainly  does  appear  ridiculous  that  if  all  the 
dollars  in  the  world  were  made  to  circulate  ten  times 
where  they  now  circulate  once  prices  would  thereby  be 
multiplied  by  ten.  It  also  appears  ridiculous  that  sub- 
stitutes for  money — everything  from  greenbacks  and 
bank  notes  to  pay  scrip  and  poker  chips — should  have 
the  same  effect  upon  prices  as  has  gold  itself.  All  de- 
rive their  value  from  gold  and  are  in  some  way  and 
form  redeemable  in  gold.  The  values  of  each  and  all 
go  up  or  down  with  gold.  They  are,  in  reality,  only 
promises  to  pay  gold  or  something  else  that  is  accept- 
able in  lieu  of  so  much  gold.  All  are  reducible  to  gold 
or  to  terms  of  gold.  Gold  is  the  only  money  of  ulti- 
mate redemption ;  the  only  kind  of  money  that  has  no 
credit  fiat  in  it;  the  only  kind  that  is  worth  as  much 
without  its  stamp  as  with  it;  the  only  kind  that  has 
value  strictly  according  to  the  bullion  or  material  in 
it. 

How  strange,  then,  that,  simply  by  multiplying 


CONCLUSION  209 

make-believe  dollars,  shadows  of  real  dollars,  we  can 
change  the  value  of  genuine  gold  dollars!  Whether 
we  pay  in  bank  notes,  bank  checks,  ordinary  promis- 
sory notes,  "I.  O.  U.'s"  or  poker  chips,  we  really  do 
not  pay  at  all  but,  instead,  through  some  kind  of  a 
promise,  suspend  payment,  or  rather,  offset  one  pay- 
ment against  another.  If,  as  is  often  the  case,  our 
creditor  accepts  bank  notes  and  checks,  because  he  can 
pass  them  on  to  his  creditors,  the  final  payment  is  only 
further  suspended  while  the  "promise  money"  per- 
forms some  work  in  cancellation  that  it  can  perform 
easier  than  can  money  of  ultimate  redemption,  which 
must  have  real  value  and  an  appreciable  weight.  Why 
carry  and  cart  real  gold  around  to  settle  100  debts 
when  98  of  them  can,  by  bookkeeping  in  clearing 
houses,  banks,  stores  and  shops,  be  made  to  cancel  each 
other.  Do  goods  or  dollars  lose  or  gain  appreciably  in 
value  because  they  circulate  or  exchange  infrequently 
rather  than  frequently?  Does  the  value  of  horses 
appreciate  according  to  the  number  of  times  they  are 
swapped? 

Goods  have  been,  and  can  again  be,  exchanged  by 
barter.  It  is  a  very  uneconomic  process.  The  device 
of  a  common  measure  or  standard  of  value  as  a  medium 
of  exchange  is  much  more  economic.  But  most  eco- 
nomic of  all,  in  the  nine-tenths  of  our  transactions 
where  it  can  be  used,  is  this  bookkeeping  or  cancelling- 
off  process.  Exchange  by  means  of  gold  is,  perhaps, 
10%  cheaper  than  barter.  Exchange  by  bookkeep- 
ing devices  is,  perhaps,  1%  cheaper  than  by  trans- 
ference of  actual  gold.  It  seems  safe  to  conclude  that 
it  is  only  within  these  limits,  and  practically  only  with- 


210  GOLD    SUPPLY    AND    PROSPERITY 

in  the  limits  of  saving  by  bookkeeping  devices,  that  the 
value  of  gold  money  can  be  changed  by  the  substitu- 
tion of  bank  notes  and  credit  currency  for  gold.  The 
abolition  of  these  forms  of  money  could  not  add  more 
than  say  5%  to  the  value  of  gold  for  less  than  5  cents 
per  dollar  would  pay  the  cost  of  transporting  gold  so 
quickly  from  one  place  to  another  that  it  would  actu- 
ally settle  ten  debts  where  it  now  settles  one. 

As  this  theory  is,  perhaps,  new,  it  may  be  further 
and  negatively  explained  by  saying  that  if  we  should 
penalize  the  use  of  bank  notes  and  checks  and  other 
forms  of  currency  to  the  extent  of  1%,  we  would  al- 
most prohibit  the  use  of  substitute  money  and  would 
drive  people  to  the  use  of  actual  gold  money,  in  nearly 
all  transactions  where  paper  currency  is  now  used. 
Then,  if  we  should  penalize  the  use  of  gold  by  10%  we 
would  drive  people  back  to  barter  in  some  form.  That 
is,  rather  than  pay  a  fine  of  1070,  they  would  make 
nine-tenths  of  their  exchanges  without  money  of  any 
kind,  just  as  country  pedlers  now  often  give  so  many 
pounds  of  sugar,  rice,  coffee  or  starch,  or  so  many 
yards  of  calico  or  sheetings,  in  exchange  for  so 
many  dozen  eggs  or  pounds  of  butter.  It  is  safe  to 
say  that  the  check  stamp  tax  reduced  the  use  of  checks, 
for  less  than  $5  payments,  by  50%  and,  for  less  than  $1 
payments,  by  75%.  This  tax  averaged  less  than  1% 
on  such  transactions.  If  a  10-cent  stamp  were  required 
on  every  dollar  of  money  of  any  kind,  every  time 
money  was  used,  it  is  probable  that  money  would  al- 
most cease  to  be  used.  That  is,  money  in  most  ex- 
changes is  a  labor-saving  device  to  the  extent  of  not 
more  than  10%.     It  would,  of  course,  greatly  incon- 


CONCLUSION  211 

venience  us  to  return  to  barter  and  we  would  not,  with 
such  a  tax,  make  half  as  many  exchanges,  either  with 
or  without  money,  as  we  now  make.  Wall  Street 
transactions  would  probably  decline  90  or  99'^/c. 

On  an  average  commodities  are  now,  perhaps,  ex- 
changed three  times  on  their  way  from  producer  to 
consumer.  A  2%  money  tax  would  probably  reduce 
the  exchanges  made  with  money  339^  ;  a  5%  tax,  677^ » 
and  a  10%  tax,  90%.  On  this  supposition,  it  is  obvious 
that  the  use  of  money,  in  any  and  every  form,  can  add 
only  about  10%  to  the  value  (price)  of  goods  and  that 
the  use  of  notes  and  checks  can  influence  prices  only 
to  the  extent  of  1%.  More  than  this  price,  the  com- 
mercial world  will  not  pay  for  the  privilege  of  using 
money.  Incidentally,  it  may  be  mentioned  that  this 
10%  appears  to  fix  the  limit  of  control  or  monopoly 
that  the  "money  power"  possesses.  If  it  could  corner 
all  of  the  gold  on  earth,  as  "Coin"  Harvey  feared  it 
was  doing,  it  could  only  "hold  us  up"  for  10%,  and  for 
only  2  or  3%,  in  most  transactions.  Our  tariff  trusts 
would  not  look  at  10%  privileges.  The  most  of  them 
demand  and  get  the  privilege  of  charging  us  from  20 
to  200%^  more  than  competing  goods  sell  for  outside 
of  our  tariff  walls. 

It  is  true,  as  we  have  seen  and  as  Professor  Laugh- 
lin,  one  of  the  great  opponents  of  the  quantity  theory 
asserts,  that  "no  very  great  quantity  of  gold  is  needed 
— a  quantity  which  bears  no  definite  relation  whatever 
to  the  amount  of  the  community's  transactions." .  This 
fact,  however,  as  has  been  shown,  does  not  mean  that 
the  value  of  a  gold  dollar  in  exchange  can  get  very  far 
from  the  value  of  the  bullion  in  it,  as  determined  by  the 


212  GOLD    SUPPLY    AND    PROSPERITY 

cost  of  production  which,  ordinarily,  is  roughly  ex- 
pressed by  the  supply  of  gold  above  ground.  Professor 
Laughlin  expresses  the  opinion  that  it  is  as  absurd  to 
suppose  that  an  increase  in  gold  will  affect  the  prices 
and  stimulate  industry  as  that  the  multiplication  of 
railway  cars  will  stimulate  commerce.  At  the  present 
moment  the  multiplication  of  cars  and  tracks  in  the 
west  would  greatly  stimulate  commerce.  The  cases, 
however,  are  not  parallel.  The  quantity  of  goods  to 
be  transported  does  not  shrink  and  swell  with  the  num- 
ber of  cars  to  move  them,  as  does  the  aggregate  price 
of  goods  with  the  number  of  dollars  to  measure  them. 
We  would  come  nearer  to  obtaining  the  parallel  if  we 
should  say  that  we  would  double  the  car  loads  of  goods 
to  be  transported  if  they  made  the  cars  only  half  as 
large  and  had  twice  as  many  of  them. 

The  Hon.  George  E.  Roberts,  director  of  the 
Mint,  exposes  the  error  of  Professor  Laughlin  when  he 
"speaks  of  the  monetary  demand  for  gold  as  though  it 
were  a  fixed  demand  which  could  be  satisfied,  and  being 
satisfied,  could  take  no  more."    Mr.  Roberts  says : 

"This  is  an  error.  The  demand  for  gold  at  a  given 
level  of  prices  may  be  satisfied,  but  with  open  mints 
new  supplies  have  a  power  to  force  their  way  into 
monetary  use  by  diluting  and  lowering  the  value  of  the 
whole  stock,  thus  forcing  a  higher  level  of  prices.  This 
is  the  essence  of  the  quantity  theory.  The  precise 
method  by  which  it  will  make  a  place  for  itself  in  mone- 
tary use  may  be  easily  shown." 

Mr.  Horace  White  shows  us  clearly  how  new 
gold  makes  a  place  for  itself  and  how,  in  doing  so,  it 
operates  to  raise  prices. 


CONCLUSION  213 

In  view  of  all  the  facts,  it  is  reasonably  safe  to  con- 
clude, even  against  the  authority  of  many  leading  econ- 
omists and  with  the  full  sanction  of  but  few  of  our  liv- 
ing economists,  that  the  quantity  theory  of  money — 
gold  alone  being  real  money — is  substantially  true,  and 
that  prices  are  affected  in  direct  ratio  as  to  the  quan- 
tity of  gold.  We  must  not,  however,  forget  that  the 
natural  course  of  prices  is  downward  and  that  a  part 
of  the  increasing  supply  of  gold  goes  to  offset  this  de- 
cline.   Otherwise  the  increase  causes  prices  to  advance. 

That  prices  have  advanced  very  materially,  during 
periods  of  great  gold  production,  there  is  no  question. 
Professors  Jevons  and  Cairns  and  Messrs.  Tooke  and 
Newmarch  credited  the  rise  from  1850  to  1855  (22% 
in  the  United  States)  to  the  gold  discoveries  in  Cali- 
fornia and  Australia  and  the  depreciation  of  gold  caused 
by  the  increased  supply  (or  lowered  cost  of  produc- 
tion). 

The  recent  great  rise  in  prices  began  in  1896  or 
1897.  The  rise  in  this  country,  according  to  the  Dun's 
index  numbers,  from  July  1,  1897,  to  December  1,  1906, 
was  49.3%  (from  $72,455,  July  1,  1897,  to  $108,172  De- 
cember 1,  1906).  According  to  Bradstreet's  index  num- 
bers the  rise  for  the  same  period  was  52%,  though  it 
exceeded  55%,  from  July  1,  1896,  to  December  1,  1906. 
Comparing  Dun's  average  for  the  year  1897,  ($75,502) 
with  his  December  1,  1906,  figures  there  has  been  a  rise 
of  43.3%.  In  England  the  rise  began  in  1895.  In  Feb- 
ruary, 1905,  Sauerbeck's  index  numbers  stood  at  60.0. 
On  November  1,  1906,  it  was  78.6,  showing  a  rise  of 
31%.  From  the  average  for  1896  (61)  to  November  1, 
1906,  there  was  a  rise  of  29%.    Apparently,  then,  prices 


214  GOLD    SUPPLY    AND    PROSPERITY 

have  risen  about  30%,  in  England,  and  50%,  in  this 
country,  from  the  low  points  of  about  ten  years  ago. 
As  there  are  interfering  factors  in  this  country — not- 
ably the  tariff  and  the  trusts — it  is  probable  that  the 
rise  that  can  be  fairly  credited  to  the  depreciation  of 
gold  is  about  30%,  or  an  average  of  3%  a  year. 

4.     High  interest  rates  follow  rising  prices. 

So  much  has  been  said  on  this  subject  on  previous 
pages  that  but  little  need  be  added  here.  When  prices 
are  rising  rapidly — say  at  the  rate  of  5%  a  year,  as  at 
present  in  this  country — there  is  a  great  demand  for 
money  to  invest  in  property  which  is  appreciating  in 
value  and  to  produce  the  things  men  want  to  buy, 
while  they  are  relatively  cheap — in  the  opinions  of 
purchasers.  Production  is  stimulated  and  active  and 
those  who  are  benefiting  by  the  rise  in  prices  become 
great  consumers  of  goods.  Everybody  is  busy  at  what 
appears  to  be  rising  wages  and  salaries.  Hence  all 
spend  freely  and  the  game  goes  merrily  on.  Orders  are 
placed  far  in  advance  of  actual  needs;  mills  and  facto- 
ries cannot  produce  fast  enough ;  they  are  being  ex- 
tended and  enlarged  as  rapidly  as  possible;  new  ones 
are  being  built — all  of  which  makes  more  work  for  all ; 
railroads  are  unable  to  transport  the  goods  offered  and 
are  increasing  their  rolling  stock,  trackage  and  terminal 
facilities,  as  rapidly  as  the  material  and  labor  market 
will  permit;  merchants  can  sell  goods  as  fast  as  they 
can  obtain  them  and,  as  they  gain  rather  than  lose  by 
carrying  goods  in  stock,  do  not  hesitate  to  order  liber- 
ally at  market  prices;  house  builders  are  active  for 
houses  are  rising  in  value  and  purchasers  are  anxious 
to  buy  early  and  get  as  much  benefit  as  possible  from 


CONCLUSION  215 

the  rise;  lumbermen,  brickmakers,  glass,  nail,  paint, 
carpet,  stove  and  furnace  makers,  carpenters,  masons, 
plumbers  and  painters  are  all  busy :  farmers  are  get- 
ting higher  prices  for  their  products  and  are  building 
new  houses,  barns  and  fences;  they  are  also  spending 
freely,  especially  for  pianos,  carriages  and  automobiles; 
land  is  appreciating  in  value  and  farmers  are  getting 
hold  of  all  the  land  they  can  carry,  often  mortgaging 
their  holdings  to  get  more  money  to  buy  more  land; 
real  estate  speculators  are  doing  likewise  in  the  city; 
bankers  are  loaning  freely  at  high  rates  and  are  rapidly 
growing  rich ;  nearly  everybody  is  either  growing  or 
feeling  rich ;  theatres  and  other  amusement  places  are 
well  patronized ;  lawyers,  doctors  and  other  profes- 
sional men  are  well  employed ;  marriages  are  numer- 
ous; the  birth  and  death  rates  are  high,  to  the  benefit 
of  doctors,  nurses,  coffin  makers  and  undertakers;  al- 
most everywhere  industry  is  growing,  business  is 
active  and  credit  is  being  extended. 

These  are  normal  conditions  during  prolonged 
periods  of  rising  prices,  or  at  least  during  the  first 
decade  or  two  of  them.  Of  course  human  nature  will 
not  stand  the  strain  of  too  much  prosperity  and  men 
will  often  over-speculate  and  get  so  far  ahead  of  their 
means,  and  of  the  economic  "procession,"  that  their 
unsound  structures  will  sometimes  break  down  and 
prices,  industry  and  speculation  will  halt,  until  eco- 
nomic conditions  catch  up.  At  such  periods — likely  to 
be  comparatively  short,  if  prices  are  tending  rapidly 
upwards — many  men  who  have  become  too  reckless  in 
speculation  or  too  extravagant  in  living  lose  titles  to 
property.     Soon,  however,  the  wheels  of  industry  will 


216  GOLD    SUPPLY    AND    PROSPERITY 

again  begin  to  turn,  confidence  will  be  restored  and  all 
who  survived  the  "halt"  in  business  will  soon  again  be 
on  the  highway  to  wealth.  Capital  will  soon  be  in  as 
great  demand  as  ever  and  prices  and  interest  rates, 
after  a  temporary  decline,  will  proceed  on  their  upward 
course. 

But  there  is  another  reason  why  interest  rates 
should  be  high  when  prices  are  rising.  When  money 
is  shrinking  in  value  interest  rates  should  be  high  to 
make  up,  or  partly  make  up,  the  losses  on  the  princi- 
pals of  loans.  To  illustrate :  suppose  that  prices  are 
rising  10%  a  year.  This  means  that  the  purchasing 
power  of  money  is  declining  about  10%  a  year.  Sup- 
pose, then,  that  $100  were  loaned  for  one  year  at  5%. 
At  the  end  of  the  year  the  lender  would  have  $105 ;  but 
with  this  $105  he  could  buy  only  about  as  much  as  he 
could  have  bought  with  $95,  at  the  beginning  of  the 
year.  In  reality,  he  has  received  no  interest  at  all  but 
has,  instead,  paid  $5  to  the  man  for  holding  his  $100. 
The  man  with  money  to  loan  cannot  afford  to  do  busi- 
ness in  this  way.  He  is  usually  as  wise  as  are  his 
neighbors  and  fully  able  to  protect  his  own  interests 
and  to  get  all  his  money  is  worth,  either  by  buying  real 
property,  investing  in  bonds  and  stock  or  by  loaning 
on  notes  or  on  call. 

Besides,  economic  conditions  are  such  as  to  make 
it  easy  for  him  to  get  high  rates.  As  a  matter  of  fact, 
while  the  profits  of  money  lenders — bankers  and  their 
depositors,  etc. — will  fall  behind,  during  the  first  few 
years  of  rising  prices,  they  will  soon  be  as  high,  and 
perhaps  a  little  higher,  than  the  average  of  profits  in 
other  industries.     Thus,  at  the  present  time,  after  ten 


CONCLUSION  217 

years  of  rising  prices,  banker's  profits,  in  Europe  and 
America  and  probably  elsewhere,  are  greater  than  ever 
before.  They  will  probably  continue  high  for  some 
time  after  other  profits  begin  to  decline. 

Of  course  money  interest  is  not  the  same  as  real, 
or  commodity,  interest.  Interest  is  so  seldom  paid  "in 
kind"  that  most  of  us  think  of  interest  only  in  terms  of 
money.  Economic  conditions  tend  to  maintain  the 
natural  or  commodity  interest  at  a  normal  rate  and  to 
overcome,  or  partially  overcome,  fluctuations  in  the 
money  rate,  due  to  appreciation  or  depreciation  of  the 
money  itself.  Natural  conditions,  then,  tend  to  equal- 
ize profits  in  various  industries,  at  least  of  all  who  have 
savings  and  accumulations. 

This  new  theory  of  money  rates  is  accepted  and 
explained  so  well  by  Professors  Fisher  and  Clark,  and 
Messrs.  Root  and  Goodbody,  that  further  explanation 
here  is  unnecessary.  It  has  also  been  discussed  at  some 
length  in  the  "Introduction."  The  fact  that  money 
rates  are  high,  when  prices  are  rising,  is  admitted  by 
Messrs.  Vanderlip  and  Warner  and  by  Professor  John- 
son, while  Mr.  Vanderlip  and  Professor  Johnson  make 
clear  some  of  the  practical  reasons  therefor.  Mr. 
White  thinks  that  more  dollars  or  fewer  dollars  have 
no  material  effect  upon  interest  rates  while  Messrs. 
Roberts  and  Branch  affirm  that  more  money  means 
lower  interest  rates. 

The  tables  of  interest  rates  presented  by  Professor 
Fisher  and  the  course  of  interest  rates,  as  shown  by 
the  tables  and  charts,  indicates  clearly  that  money 
rates  tend  to  rise  and  fall  with  prices.  We  have  seen 
that  wholesale  prices  in  the  United  States  have  risen 


218  GOLD    SUPPLY    AND    PROSPERITY 

about  50%  during  the  last  10  years,  about  30%,  or  3% 
a  year,  of  which  is  probably  due  to  the  depreciation  of 
gold.  From  1897  to  1906,  inclusive,  the  interest  rate 
rose  from  3.7%  to  5.7%.  If  the  normal  rate  of  interest 
is  4%  the  average  rate  in  1906  was  nearly  2%  above 
normal.  That  would  mean  that  money  lenders  were 
getting  rather  more  than  half  of  the  benefits  from  ris- 
ing prices.  By  the  end  of  1906,  with  rates  averaging 
about  7%,  the  money  lender  was  taking  all  the  bene- 
fits. When  this  condition  exists  not  only  speculation 
but  legitimate  industry  refuses  to  proceed,  until  lower 
rates  prevail.  It  is,  therefore,  fair  to  assume  that 
money  rates  cannot  be  maintained,  for  more  than  a  few 
months  at  a  time,  much  above  6%  without  bringing 
about  a  reaction  in  business.  Of  course,  if  the  price 
level  should  begin  to  rise  more  rapidly  a  higher  rate  of 
interest  might  be  maintained.  While  it  is  improbable 
that  time  money  will  average  much  below  6%,  for  any 
year  in  the  near  future,  it  is  also  improbable  that  it 
will  average  much  above  this  rate. 

While  discussing  this  subject  mention  should  be 
made  of  the  somewhat  remarkable  prediction  made  in 
1889,  by  Mr.  Charlton  T.  Lewis.  In  his  paper  on  "The 
Normal  Rate  of  Interest,"  read  before  the  Actuarial 
Society  of  America  in  October,  1899,  he  made  the  fol- 
lowing prophesy: 

"The  evidence  is  strong  that  the  tide  has  turned, 
and  that  the  industrial  and  commercial  experiences  of 
half  a  century  ago  are  about  to  recur  on  a  vaster 
scale." 

He  holds  that  interest  rates  rise  and  fall  with  the 
tide  of  general  business  and  that,  in  fact,  the  profits  of 


CONCLUSION  219 

business  fix  the  rate  of  interest.  He  asserts,  though, 
that  the  returns  from  capital  invested  for  interest  aver- 
age much  higher  than  do  those  from  capital  invested 
in  production  enterprises.  He  says  the  hopes  of  future 
profit  on  the  part  of  "sanguine  adventurers  in  industry" 
are  so  seldom  realized  that  it  is  an  "economic  law"  that 
"the  rate  of  interest  under  all  fluctuations,  maintains 
a  level  materially  higher  than  the  average  increase  of 
capital." 

Dr.  Lewis  said  that  there  are  small  and  large 
fluctuations  in  interest  rates,  the  smaller  ones  affect- 
ing call  rates,  mainly,  and  the  larger  ones  time  money 
rates.  Each  movement  is  "much  disturbed  by  local 
and  temporary  influences,  especially  by  wars,  legisla- 
tion and  commercial  crisis.  Yet  each  can  be  traced 
with  distinctness,  on  large  averages,  as  an  event  in  uni- 
versal history."  Interest  rates,  he  said,  fell  "through- 
out Christendom"  for  30  years  after  1815;  then  rose  for 
more  than  25  years;  then  declined  from  1872  to  1897. 
He  prophesied  that  "history  will  date  the  turn  of  the 
great  tide  in  the  year  1897"  and  that  "a  conservative 
provisional  estimate  of  the  permanent  average  yield  to 
be  expected  hereafter  from  invested  capital  for  many 
years  would  perhaps  fix  it  at  about  5%." 

He  repudiated  the  theory  that  "abundance  of 
money  in  itself  makes  interest  low"  and  said  that  "the 
most  marked  and  general  rise  of  rates  ever  known  was 
in  progress  for  the  20  years  after  the  discoveries  in 
California  and  Australia."  He  also  repudiated  the 
theory  that  "increased  wealth  and  economic  progress 
of  themselves  lower  interest  rates."  "All  experience," 
he  said,  "proves  that  the  demand  for  capital  finds  its 


220  GOLD    SUPPLY    AND    PROSPERITY 

supreme  stimulus  in  the  expectation  of  productiveness. 
This  expectation  is  excited  chiefly  by  discovery  and 
invention."  Believing  that  the  drowsy  period  of  indus- 
try ended  in  1895  to  1897  and  that  a  new  era  of  inven- 
tion and  enterprise  then  began,  he  predicted  that  "if 
the  world's  peace  is  maintained,  there  is  not  in  pros- 
pect any  check  to  the  gradual  rise  of  interest." 

Dr.  Lewis  did  not  discus  the  causes  that  produce 
industrial  activity  and  inactivity  and,  apparently,  did 
not  see  clearly  the  connection  between  prices  of  com- 
modities and  profits  or  between  prices  and  changes  in 
the  standard  of  value.  Nowhere  is  there  a  suggestion 
that  interest  rates  (money  rates)  are  affected  by  either 
small  or  great  changes  in  the  standard  of  value.  His 
conclusions  were  based  entirely  upon  what  he  believed 
to  be  an  economic  law  of  periodicity  in  industry.  No- 
where is  there  a  suggestion  that  the  great  changes  that 
occurred  about  1850  and  about  1896  were  the  result  of 
increasing  supplies  of  gold. 

Had  space  permitted  liberal  extracts  from  this  and 
another  paper  of  Dr.  Lewis  on  interest  rates  would 
have  been  printed  in  an  appendix  to  this  book.  The 
prescribed  limit  of  the  book  has  already  been  reached. 

The  following  table,  giving  the  average  rates  of 
interest  paid  by  "commercial  borrowers"  in  different 
cities,  is  from  the  Boston  News  Bureau  of  January  30, 
1907: 


CONCLUSION  221 


INTEREST  RATES  FOR  1906 


%  1st  %  2d  %  3d 

quarter    quarter  quarter 

Baltimore 5.45  5.45  5.625 

Boston 5.55  5.55  5.75 

Chicago 5.20  5.35  5.55 

Cincinnatti 5.25  5.50  5.75 

Detroit 5.45  5.70  5.30 

Ivos  Angeles 5.25  5.75  5.80 

New  Orleans 6.00  6.125  6.375 

New  York 4.955       5.152  5.597 

Philadelphia 5.75  5.75  6.00 

Seattle 7-00  7.00  7.00 

St.  Louis 5.50  5.55  5.65 


%  4th 

Av.  for 

quarter 

vear 

5.875 

5.60 

5.95 

5.70 

6.70 

5.70 

6.00 

5.625 

5.35 

5.45 

6.60 

5.85 

7.00 

6.375 

6.946 

5.655 

6.00 

5.875 

7.00 

7.00 

6.00 

5.675 

Average 5.575       5.717       5.854      6.311       5.864 

5.     High  interest  rates  mean  low  prices  for  bonds. 

With  money  rates  continually  above  5%  and 
averaging  nearly  6%,  most  men  who  have  surplus 
money  will  not  keep  it  invested  in  bonds  or  other  obli- 
gations drawing  fixed  and  low  rates  of  interest,  divi- 
dends or  income.  If  they  have  money  invested  in  this 
way  they  will,  when  they  realize  that  rates  are  rising 
and  are  likely  to  be  high  for  a  long  time,  withdraw 
from  fixed  investments,  where  they  realize  only  from  3 
to  57f ,  and  reinvest  in  stocks  or  titles  to  property  that 
will  participate  in  advancing  prices  and  that  promise 
a  net  return  of  6%  or  more. 

Another  reason  why  they  will  be  dissatisfied  with 
yields  of  only  3  or  4%  comes  from  the  fact  that,  when 
prices  are  rising  at  the  rate  of  S^c  a  year  and  the  pur- 
chasing power  of  money  is,  therefore,  decreasing  S'^'/c  a 
year,  an  investor  is  really  losing  more  on  the  principal 
of  his  investment  than  he  is  gaining  in  interest  or  divi- 
dends.   He  cannot,  then,  when  prices  are  rising,  afford 


222  GOLD    SUPPLY    AND    PROSPERITY 

to  invest  at  as  low  rates  as  when  prices  are  stable  or 
falling.  Nor  will  he  have  to  do  so.  Opportunities  for 
greater  income  will  present  themselves  on  all  sides. 
Gradually  investors  will  drop  their  low-rate  invest- 
ments to  invest  in  titles  and  property  yielding  high 
rates. 

This  is,  in  fact,  just  what  investors  have  been  do- 
ing for  five  or  ten  years.  This  is  why  high-grade  bonds 
and  stocks  all  over  the  world  have  been  declining, 
while  the  prices  of  low-grade  bonds  have  changed  but 
little  and  the  prices  of  low-grade  stocks  have  risen  rap- 
idly. What  have  heretofore  been  considered  gilt-edge 
securities  and  perfectly  safe  investments  have,  in  fact, 
proven  to  be  the  most  unsafe  of  all ;  while  many  low- 
grade  stocks  and  bonds  have  not  only  proven  safe,  be- 
cause there  has  been  no  shrinkage  in  values,  but  have, 
in  many  cases,  both  advanced  in  price  and  returned 
handsome  incomes. 

Gradually  but  surely,  during  the  past  few  years, 
the  rate  of  income  on  bonds,  mortgages  and  preferred 
stocks  has  been  rising.  Where  the  normal  rate  on  gov- 
ernment and  municipal  bonds  was  less  than  3%,  a  few 
years  ago,  it  is  now  fully  4%.  It  would  undoubtedly 
be  above  5%  were  not  many  classes  of  investors  com- 
pelled to  invest  in  certain  kinds  of  securities.  Per- 
haps one-third  of  all  money  invested  is  restricted  in 
this  way.  Savings  banks,  insurance  companies  and 
many  trustees,  etc.,  can  invest  only  in  well-tested  high- 
grade  securities.  For  this  reason  the  process  of  ad- 
justment to  higher  interest  and  income  rates  is  very 
slow.  It  is,  however,  none  the  less  sure.  By  shrink- 
age in  prices  of  old  bonds  and  by  higher  rates  of  inter- 


CONCLUSION  223 

est  on  new  bonds,  mortgages  and  preferred  stocks,  the 
readjustment  will,  in  time,  be  complete. 

That  the  prices  of  bonds  are  declining  all  over  the 
world  is  beyond  question.  Very  few,  however,  realize 
the  extent  of  the  decline,  or  that  the  greatest  decline 
has  been  in  the  highest-grade  bonds. 

Take  some  of  the  world's  government  bonds! 
British  consols  have  long  been  considered  "the  invest- 
ment index  of  the  world."  They  have  declined  from 
114  to  86  in  ten  years.  After  allowing  for  the  change 
in  the  rate  of  interest  from  2Y^  to  2^%  the  decline  is 
over  20  points,  or  about  2%  a  year.  This  loss  has 
nearly  equaled  the  income  from  these  bonds  during  the 
last  eight  or  ten  years.  Thus  the  investor  has  really 
given  back,  in  loss  of  purchasing  power,  nearly  all  he 
has  taken  from  Great  Britain  in  interest. 

The  following  table  of  bonds,  either  issued  or 
guaranteed  by  the  British  Government,  is  from 
Moody's  Magazine  of  October,  1906.  These 
bonds  constitute  what  is  termed  the  "gilt-edged  mar- 
ket" and  comprise  all  securities  in  which  trustees  may 
legally  invest  the  funds  committed  to  their  charge. 
The  quoted  prices  are  for  about  September  20,  of  the 
years  mentioned. 


224 


GOLD    SUPPLY    AND    PROSPERITY 


PRICKS  OF  BRITISH  INVESTMENT  BONDS. 


Highest 


1^ 

British  Consols 214 

Met.  Consol.'i 3'/^ 

London  Connt\ 3 

I^eeds 4 

I,iverpool 3]4 

Manchester  4 

New  South  Wales 314 

Queensland 3'A 

Canada 3 

Cape 3'A 

I.on.  &  N.  Western 3 

Midland  2'A 

Great  Western 4 

Average 3.3 

*  Then  2?^%        t  Then  3% 


1906. 

1905. 

1904. 

1896 

se'A 

89/8 

88'A 

*113ra 

102 

104 

lOA'A 

128K 

88A 

94  J^ 

93 

1283^ 

108 

109 

lUj^ 

130^ 

107 

109 

109 

144'X 

123 

128H 

1245^ 

159 

lOOJ^ 

100 

96 

112K 

99^ 

99 

96 

lllM 

98^ 

lOOM 

97 

107^ 

97 

98 

95 

120 

93 

96 

95 

124K 

76 

79 

78 

ri243^ 

123 

127 

123^ 

164 

Thus  these  13  British  bonds,  supposedly  the  safest 
and  least  speculative  of  all  securities,  have  declined 
an  average  of  over  28  points  in  10  years.  Considering 
incomes  and  present  prices,  the  unfortunate  investors 
in  these  bonds  have  not  only  received  less  than  I'^/o  on 
their  investments,  during  the  last  ten  years,  but,  should 
they  sell  their  bonds,  they  would  find  that  the  pro- 
ceeds have  lost  30%  of  the  purchasing  power  of  a  simi- 
lar amount  10  years  ago.  Altogether,  they  have  suf- 
fered a  net  loss,  over  incomes,  of  more  than  20%,  or 
over  2%  a  year. 

The  bonds  of  other  European  countries  have  de- 
clined almost  as  much,  and  those  of  Russia  even  more, 
than  have  those  of  Great  Britain.  Nearly  all  are  now 
at  or  near  bottom  prices  and  are  falling.  German  Im- 
perial 3's  decUned  from  91.50,  June  30,  1903,  to  88.10, 


CONCLUSION  225 

May  10,  1906.  French  rentes  (3's)  declined  over  5% 
since  1901.  Our  own  government  bonds  have  declined 
comparatively  little  because  they  are  given  special 
privileges  in  connection  with  our  bank  note  currency 
that  makes  them  sell  at  artificial  and  unnatural  prices 
for  bonds. 

The  shrinkage  in  the  prices  of  municipal  bonds 
has  been  remarkable,  during  the  last  few  years.  Thus, 
as  recently  as  1900,  New  York  City  issued  S^c  40-year 
bonds  and  sold  them  at  a  premium.  From  1901  to 
1905,  it  issued  only  3^%  bonds.  Its  last  issue,  in  1905, 
was  sold  ostensibly  at  par,  but  really  considerably  be- 
low par,  when  the  revenue  bond  bonus  that  went  with 
the  syndicate  bid  is  allowed  for.  The  1906  issues  were 
all  at  47c  and  the  last  ones  were  sold  close  to  a  4^0 
basis.  On  February  1,  1907,  $30,000,000  of  4's  were 
sold  at  the  smallest  possible  premium,  and  short-term 
4's  received  no  bids. 

Other  American  cities  have  had  a  similar  or  worse 
experience.  Many  offers  of  4%  bonds  have  found  no 
bidders.  This  decline  is  in  no  way  due  to  lack  of  con- 
fidence in  the  ability  of  our  cities  to  meet  their  financial 
obligations.  The  revenue  resources  of  our  cities  are 
growing  even  more  rapidly  than  are  their  obligations. 
Their  credit  was  never  better.  The  decline  is  due  en- 
tirely to  the  changed  conditions  which  have  resulted 
in  higher  earnings  and  interest  rates.  Before  there 
can  be  a  great  market  for  bonds,  their  incomes  must 
approach  a  parity  with  the  incomes  and  earnings  from 
other  investments. 

The  prices  of  the  bonds  of  railroads,  street  rail- 
ways, gas,  electric  light  and  telephone,  telegraph  and 


226  GOLD    SUPPLY    AND    PROSPERITY 

express  companies  have  generally  declined,  during  the 
last  few  years,  and  this  notwithstanding  the  very  re- 
markable increase  in  the  earnings  and  assets  of  these 
companies.  Of  course  income,  convertible  and  other 
bonds  that  may,  in  some  way,  participate  in  profits  are 
not  considered  in  the  category  of  regular  bonds. 

Similar  statements  can  be  made  as  to  the  prices 
of  bonds  of  manufacturing  concerns  and  as  to  the  as- 
sets and  earnings  of  these  and  other  industrial  corpo- 
rations, except  that,  as  a  rule,  their  earnings  have  in- 
creased even  faster  than  have  those  of  railroads  and 
other  public  service  corporations. 

The  following  tables  of  statistics  of  bonds  and 
stocks  show  the  general  trend  of  prices  from  Novem- 
ber, 1896,  to  November,  1906: 


BOND  PRICES 

Table  of  prices  of  all  important  bonds  actively  traded 
in  on  the  New  York  Stock  Exchange,  on  which  the  full 
rate  of  interest  has  been  continuously  paid  during  the 
last  ten  years,  or  since  first  issued.  All  prices  are  flat 
and  are  for  November  1  of  each  year,  or  as  nearly  as 
possible  to  this  date. 


RAILROAD 


Atch.,  Top.  &  S.  Fe  gen.  4s.  1995 
Bait.  &  Ohio  prior  lien  3}<^s.  1925 

First  4s   1948 

Cent,  of  Georgia  cons.  5s..  1945 
Cent,  of  New  Jersey  gen  5s.  1987 
Cent.  Pacific  1st  ref.  gu.  4s.  1949 
Chesa.  &  Ohio  1st  cons.  5s..  1939 

General   4^s    1992 

C.  &  Alton  Ry.  1st  lien  3i^s.  1950 
Chic,   Burl.   &   Quincy— 

Illinois   Div.    1st   3i^s....l949 

Nebraska  Ext.  4s 1927 

Jt.  4s  (Gt.  No.-No.  Pac.).1921 
Chic.   &   E;.    111.   gen.   con.   & 

1st    5s    1937 

Chicago  &  Erie  1st  5s 1982 

Chic,   Mil.   &   St.   Paul  gen. 

4s,    Ser.   A 1939 

Chic.  &  Northwn.  gen.  3><s.l987 
Chic,  R.  I.  &  P.  Ry.  gen.  4s.  1988 
C.,  St.  P.,  M.  &  O.  cons.  6s.  1930 
CI  C,  C.  &  St.  h.  gen.  4s.  1993 
Colorado   Midland    1st  4s...  1947 

Colo.  &  Southern  1st  4s 1929 

Denv.  &  Rio  Gr.  1st  cons.  4s.  1936 

Erie    1st  cons,   prior  4s 1996 

Hocking  Val.  1st  cons.  4^s.l999 

Illinois  Central   1st  4s 1951 

First   3Hs 1951 


1896      1901 


765^ 
(b) 
(b) 
91 

112 
(c) 

107^ 

(d) 
(c) 
(e) 

94 

107 

93'A 
(a) 
(b) 
123K 
88 
(a) 
(c) 
86 
89^ 
(c) 

no 

104 


103 

9654 
102^ 
105 
131 
102J^ 
12VA 
107 

85 

102?^ 
110 
98% 

122 
123^8 

111 
111 

106K 
140  K 
104K 

81 

8854: 
103 

99^8 
107/8 
1155< 
106 


1905 

1906 

102?^ 

1003^ 

9541 

943^ 

103 

101 K 

116^8 

lllK 

134J/, 

128 

101 '4 

99% 

118'4 

118J^ 

108'^ 

105K 

8134 

78K 

96K 

93^ 

105  K 

103J^ 

my^ 

99% 

\im 

119 

122% 

119K 

111 

1085^  - 

101 

96%  - 

105J4 

102^8  - 

138ys 

133      - 

103% 

102^  - 

73y, 

74 

94M 

92      - 

101% 

99      - 

102'/8 

99%  - 

lll'/s 

106      - 

111 

109^  - 

1023^ 

100      - 

%  Decrease  or 
Increase  Since 


1905      1901 


1.9—  2 
1.0—  2 
1.7l—  1.2 
4.6, -f  6.0 
5.0—  2.3 
1.4—  2.6 
0.2 —  2.7 
3.0!—  1:6 
3.4—  7.6 

3.1  —  9.1 
1.7—  5.9 
2.4  +  1.0 

2.3—  2.5 
3.0;—  3.1 


+  16  0 


7.5 
16.5 


2.3—  2.3 
4.2—12.8 

3.4—  4.3 
3.7—  5.2 
1.2,—  1.9 
0.7—  8.6 
2.4, -r  4.2 
2  7—  3.9 
2.3  -  0.6 
4.6—  1.0 
1.4—  5.2—  0.5 
2.7,—  5.7  —  3.8 


1896 


+22.3 
+  14.3 


+10.2 
+49.3 


-20.0 


+26.6 
+  11.4 


15.0 
11.5 


227 


■228 


GOLD    SUPPLY    AND    PROSPERITY 


RAILROAD 


Int.  &  Gt.  Northern  1st  6s.  .1919 

Iowa  Central   1st   5s 1938 

Kan.  City  Southern  1st  3s..  1950 
Lake  Erie  &  Western  1st  5s.  1937 
Lake  Sh.  &  M.  So.  1st  3j4s.l997 
Lehigh    Val.    of    N.    Y.    1st 

lu.   4J^s    1940 

Long  Island   gen.   4s 1938 

Unified   4s    1949 

Louisville  &  Nashv.  gen.  6s.  1930 

Unified   4s    1940 

Manhattan  Ry.  cons.  4s 1990 

Min.  &  St.  L.  1st  cons.  5s.  1934 
Mo.,  Kan.  &  Texas  1st  4s..  1990 
Missouri  Pac.  1st  cons.  6s..  1920 

Mobile  &  Ohio  gen.  4s 1938 

Nash.,    Chat.    &    St.    L.    1st 

cons.    Ss    1928 

N.  Y.  C.  &  H.  R.  ref.  3^s.l997 
N.  Y.,  Chic.  &  St.  L.  1st  4s.  1937 
N.  Y.,  Ont.  &  W.  ref.  1st  4s.  1992 
Norfolk  &  Southern  1st  5s.  1941 
Norf.  &  Westn.  1st  cons.  4s.  1996 
Northern  Pac.  pr.  In.  ry.  & 

1.   g.   4s 1997 

Ore.  RR.  &  Nav.  cons.  4s..  1946 
Ore.   Sh.  Line   1st  cons.   5s.  1946 

Penna.  Co.  gu.  1st  4>^s 1921 

Penna.  RR.  1st  real  est.  4s.  1923 
Peoria  &  Eastn.  1st  cons.  4s.  1940 

Reading   Co.   gen.   4s 1997 

Rio  Grande  Westn.  1st  4s.  1939 
St.  L.  &  San.  Fran.  gen.  5s.  1931 

Refunding  4s 1951 

St.  L-,  Iron  Mtn.  &  Southern — 

Gen.  cons.  &  land  gr.  5s.  1931 

Unifying  &  refunding  4s.  1929 
St.  Louis  Southwn.  1st  4s..  1989 
St.  P.  &  Sioux  City  1st  6s.  1919 
St.  P.,  M.  &  Man.  1st  cs.  6s.  1933 
San.   Ant.   &  Aran   Pass   1st 

gen.   4s    1943 

Southern  Ry.  1st  cons.  5s..  1994 
Term.   RR.   Assn.   of  St.   L. 

1ft  cons.   5s 1944 

Texas  &  Pacific   1st  Ss 2000 

Toledo  &  Ohio  Cent.  1st  Ss.l93S 
Tol.,  Peo.  &  Westn.  1st  4s.  1917 
ToL,  St.  L.  &  Wn.   1st  4s..  1950 


115 
94M 
(d) 

(*) 

99  J< 
90 

(c) 
113 
74K. 
93     ' 
99 
82  K 
83 
63^ 

98 

(a) 
103^ 

85 
103 
§  70 

85% 

82 
(a) 
109^ 
108 

73^ 

73K 

92 

(e) 

72J^ 

(t) 

66 
127 
122 

54 
87  K 

102 
843/ 

105 
75 
(d) 


125^ 
1173/ 
683/ 
121^ 
llOK 

iioK 

1023/ 
98  J^ 

1193/ 

101 K 

103 

1213/ 

100 

125^ 
95  K 

112K 

109J^ 

107 

104M 

1125^ 

103 

104^ 
103  Ji 
1175< 

ns'A 

109^ 
983/ 
97% 

101 K 

116 
98% 

116}< 

92 

97 
129 
139^ 

87  K 
119?^ 

115 

119^ 

IISH 

93 

82 


122J^  116 
117  109 
72%     71 K 


%  Decrease  or 
Increase  Since 


1905      1901      1896 


119 
102% 


115 
96 


niH  109K 

101%     99?< ; 
100%  i     95% 
121%'  118 
104%;  101 K 
103?i'  100% 
116%'  1U%\ 
101%      99K 
125%    118 
98     !     93 
I 

114KI  113 

9954  95     1 

104%'  102 

104?i  102 

108?<  104 

101%  993/ 

104%!  103% 
102K    101 
119%    116% 
109%    106% 


5.3 
6.8 
1.6 
3.4 
6.3 

2.2 
1.8 
4.6 
2.9 
3.S 
3.3 
2.7 

■  2.2 
6.0 
5.1 

•  1.5 

■  4.8 

■  2.3 

■  2.6 

■  4.4 

■  1 


—  7.6 

7.4 

3.6 

5,3 

12.9 


+  0.9 
+  15.3 


—  1.1  +10.1 

—  2.9  +10.8 
2.6 
1.5 
0.5 

—  2.5 

—  7  0 

—  0.7 

—  6.0 
2.4 


+  0.4 
—13.2 

—  4.7 

—  2.4 

—  7.3 

—  3.2 


109 

1043/ 

TOO 

97Ki 

102% 

100 

993/; 

96 

114% 

110 

89%8 

83% 

n6K 

114%8 

94^ 

91  }i 

97% 

97 

123 

119% 

140 

133 

893/( 

86% 

120% 

n6H 

122yR 

117 

125% 

120 

115 

113% 

93 

89% 

84 

793/ 

1.0—  1.2 
1.7—  2  3 
0,6 
3.5 
4.3 
—  1.5 
2.2 
5.2 
>—  5.2 
-14.7 


2.4 

2.7 

3.9 

2.7 

2.4 

3 

3.9 

5.9 


1.8 
3.2 
0.9 
2.7 
5.0 

3.6 
3.2 

4.2 

4.4 

1.3 

3 

5 


—  1 

—  0.8 


4.4 

+35.9 
+  7.9 
14.4 
+  20.7 
+42.2 
+46.5 

+  15.3 


—  1.4 
+  20.0 
+  1.0 
+42.5 

+20.5 
+  23.2 


—  2.7 

-  3.0 
+32.3 


+30.6 
+  19.6 


+57.4 


—  7.3 

4.5 

D.9 

—  2.6 

+  1.7 
+  0.6 

—  1.4 

—  3 

—  2.7 


+47.0 
—  5.8 
+  9.0 

+60.2 
+33.8 

+  14.7 
+41.6 
+  8.1 
+  19.3 


CONCLUSION 


229 


RAILROAD 

1896 

1901 

1905 

1906 

%  Decrease  or 
Increase  Since 

1905 

1901 

1896 

Ulster   &    Del.    1st  cons.    5s.  1928 
Un.  Pac.  1st  rr.  &  Id.  gr.  4s.  1947 

Wabash    1st   Ss 1939 

West  Shore  1st  gu.  4s 2361 

Wheel.  &  L.  E.  1st  cons.  4s.  1949 
Wisconsin  Cent.  1st  gen.  4s.  1949 

99K 

(a) 
103-% 
104K 
(c) 
(c) 

108 
105% 

91 
88 

112K 
10554 
119 
109K 

92 

96% 

112 

1031/8 
113% 
105  J^ 

90 

—  0.2 

—  1.9 

—  4.8 

—  3.4 

—  6.0 

—  6.5 

+  3.7 

—  2.5 

—  3.6 

—  6.4 

—  4.9 
+  2.3 

+  12.8 

+  9.3 

+  1.2 

Average  75  bonds  (66  roads) ... 
52  bonds  (49  roads) ... 

"93.22 

(c) 

IWA 
no'A 

74 
107 

92 
*  80 
(b) 
(b) 
(a) 
96 

(d) 

82 

(d) 

119J< 

(f) 

:     (d) 
"97.35 

106.58 

106.63 

103.00 
108.22 

89/8 

112^ 
105 
105 
108K 

106 

99 
101 
106M 
108^ 

84 

98 
108J^ 

91 

115^ 
98% 

102% 

—3.40 

-3.36 

+  16.1 

92 

m'A 

114 

1045^ 

116% 

111 
1013^ 
9654 
109 
119% 
110 

102 

111 

103 
123 
(f) 

108^ 

95 

118J^ 
107 
110 
114% 

108% 
103 
103 
109^ 
114J^ 
88 

102^ 

112 

95 
118 
97 

104% 

—  6  2 

—  5.1 

—  1.9 

—  4.5 
-5.5 

—  2.1 

—  3.9 

—  1.9 

—  2.7 

—  5.2 

—  4.5 

—  4.4 

—  3.1 

—  4.2 

—  2.1 
+  1.3 

—  1.9 

—  3.1 

-7.4 
-7.9 
+  0.5 

—  6.8 

—  4.5 

—  2.5 
+  4.4 

—  2.3 

—  9.0 
—23.6 

—  3.9 

—  2.3 

—11.7 

—  6.1 

MISCELLANEOUS 

Am.   Hide  &  Leath.   1st  6s.  1319 
B'way   &   7th   Ave.    RR.    1st 

cons.    5s 1943 

Bklyn.  City  RR.  1st  cons.  Ss.l941 
Bklyn.  Rap.  Tr.   1st  cons.  Ss.l94S 
Bklyn.  Un.  Gas  1st  cons.  5s.  1945 
Chic.    Gas    Lt.    &    Coke    1st 

gu.   5s 1937 

—  3.4 

—  5.0 
+41.9 
+  1.4 

+15.2 

Colo.  Fuel  &  I.  gen.  s.  f.  5s.  1943 
Detroit  City  Gas  pr.  In.  Ss.l923 
Enter.   Paper  1st  cons.   6s...  1918 
Met.  St.   Ry.gen.col.tr.   5s.  1997 

Nat.   Starch  Mfg.   1st  6s 1920 

N.    Y.    &   Queens    El.    L.    & 

P.    1st  cons.    Ss 1930 

Tenn.  Coal,   Iron  &  RR.— 

Birming.  Div.  1st  cons.  6s.  1917 
Third    Ave.    RR.    1st    cons. 

gu.    4s    2000 

First    5s    1937 

U.  S.  St.  col.  tr.  2d  mtg.  5s.  1963 
Western   Union  Teleg. — 

Funding  &  real  est.   45^s.l950 

+  13.7 

—12.2 

+32.3 
—""3.5 

—  5.8 

Average  16  bondsl  (15  co's.) 

9  bonds  (9  co's.) 

108.93 

106.46 

102.52 
104.89 

* 

+  7.5 

107.75 

Total   average   RR.    &    Misc. 

91  bonds  t  (81  co's) 

61  bonds  (58  co's) 

"9537" 

106.54 

102.76 
106.55 

-  3.5 

-  4.6 

+  11.7 

230 


GOLD    SUPPLY    AND    PROSPERITY 


U.  S.  GOVERNMENT 


U.  S.  2s  consols,  coup 1930 

U.  S.  3s  10-20S  coup 1918 

U.  S.  4s  coupon    1925 


Average  3  bonds 


FOREIGN 
GOVERNMENT 


British  Consols  (2^%). 
French  Rentes  (3%)  fr 

Average  of  2  bonds 


1896      1901      1905      1906 


(d)  ,  109  K:  103  K 
(b)  1085^1  104K 
nS^Al  13954  \  134^ 


104^ 
1035^ 
Ul'A 


%  Decrease  or 
Increase  Since 


1905      1901      1896 


+  1.2—  4.3 

—  1.0—  4,6 

—  2.2—  5.7 


119.08ill4. 


113.16 


11108^^1  9Ui 
102.62*: 100. 80 


105.69    96.37 


94.16 


0.8 


86i's  —    2.5 
95.621  —  4.4 


5.0 


90.84  —  3.5—  5.7 


+  11.0 


-19.9 
■  6.8 


*  No  sales — asked  price  as  of  July,  1896.  §  No  sales — bid  price  as  of  Novem- 
ber. 1896.  t  Omitting  U.  S.  Steel  Bonds.  H  Rate  was  2K  %  per  annum  to 
April  5,  1903.     Bonds  not  issued  until  a  1897;  b  1898;  c  1899;  d  1900;  e  1901;  f  1903. 


STOCK  PRICES 


RAILROAD 


A-tchison,  Topeka  &  SantaFe- 

Preferred 

Baltimore  &  Ohio,  com 

Canadian  Pacific,  com. 

Chesapeake  &  Ohio 

Chicago,  Milwaukee  &  St.  Paul 

Preferred 

Chicago  &  North  Western 

Preferred 

Cleve.,  Cin.,  Chic.  &St.I^.,  com 

Delaware  &  Hudson 

Delaware,  I,ack.  &  Western... 
Erie 

First  Preferred 

Second  Preferred 

Great  Northern 

Illinois  Central 

Louisville  &  Nashville 

Manhattan  Ry 

Missouri,  Kansas  &  Texas 

Preferred 

Missouri  Pacific 

N.  Y.  Central  &  Hudson  River 
N.  Y.,  New  Haven  &  Hartford 

N.  Y  ,  Ontario  &  Western 

Norfolk  &  Western 

Adjustment  Preferred 

Northern  Pacific 

Pennsylvania. 

Reading  Co. 

First  Preferred 

Second  Preferred • 

Southern  Pacific  Co.,  com 

Southern  Ry,  vot.  trust  efts 

Preferred  vot.  trust  ctfs 

Texas  &  Pacific 

Union  Pacific 

Preferred 

Wabash 

Preferred 

Average  40  stocks  (28  co's) 


e  12^ 
23^ 

/33|/8 
57" 

16/8 

74 
125 
102% 
146 

28  5< 
124 
157 

15/8 

33  J< 
20 
115 
92 
47  5< 
93 
12 
26 
21'^ 
95 

i  15J^ 
S  27 

12K 
klWA 
18^ 
'  42K 
/   26 
14 
9 
27  K 
8^ 
n  14% 
(P) 
7 

16/8 


77% 
96'^ 
106 

110/8 

46^ 

169% 

189/8 

209 

239 
995^ 

172% 

239J^ 
41% 
70 
565^ 

194 

139 

103  J^ 

122^^8 
25% 
50K 
97% 

158% 

214 
34% 
56Vi 
90 
*150 

146% 
425^ 
77/s 
53K 
59  K 
31K 
86% 
39/8 

100% 
88% 
20 
365< 


1905      1906 


%  Decrease  or 
Increase  Since 


*51 .55  103.56 


104 

112% 

171% 
55K 

180% 

187% 

222 

240 
99X 

237 

485 
48 
81 
72  X 

315 

178  5< 

1525i 

165% 
33% 
69% 

104 

152 

203% 
54/8 
86% 
93 

205 

1453/i 

128% 
94 
99% 
70% 
36% 
99% 
34% 

133/8 
95% 
21% 
41/b 


101% 

100% 

119 

175% 
56 

172 

191 

202 

235 
94 

216% 

550 
44 
76 
67% 

317 

172 

143% 

143  5< 
34% 
68% 
94% 

128 

194 
45% 
94/8 
90 

212% 

145 

1423/i 
90 
95% 
91% 
34% 
94% 
36% 

182% 
92% 
19  K 
43/8 


+  14.6 

—  3.0 
+  5.8 
+  2.0 
+  0.4 

—  4.7 
+  1.9 

—  9.0 

—  2.1 

—  5.3 

—  8.6 
+  13.4 

—  8.3 

—  6.2 

—  6.6 
+  0.6 

—  3.5 

—  5.7 
13.4 

2.6 

1.4 

9.3 

—15.8 

4.7 

—16.2 

+  8.7 

—  3.2 
+  3.7 

—  0.5 
+  11.1 

—  4.3 

—  3  5 
+30.0 

—  5.8 

—  4.9 
+  5.1 
+37.1 

—  3.1 
—10.9 
+  4.9 


129.92  130.12  +   0.1  +     25.6  +   152.4 


30.0 

4.5 

12.3 

59.1 

20.4 

1.5 

1.0 

3.3 

1.7 

5.5 

25  6 

129.6 

6.3 

8.6 

19.5 

63.4 

23.7 

38.6 

16.8 

34.3 

36.3 

3.6 

19.2 

9.3 

31.5 

65.5 


41.7 

1.0 

233.9 

16.7 

78.1 

54.4 

7.9 

9.2 

7.3 

81.1 

4.1 

3.7 

19.0 


1896 


+  718.2 
+  324.7 
+  256.6 
+  204.8 
+  247.3 
+  132.4 
+  52.8 
+  97.1 
+  61.0 
+  232.7 
+  74.6 
+  250.3 
+  191.0 
+  126.9 
+  237.5 
+  175.7 
+  87.0 
+  239.6 
+  54.0 
+  185.4 
+  163.5 
+  339.0 
+  34.7 
+  12.5 
+  215.7 
+  507.3 
233.3 
+  1634.7 
38.8 
+  682.2 
+  113.0 
+  268.2 
+  553.6 
+  280.5 
+  248.2 
+  326.5 
+  1126.9 


231 


232 


GOLD    SUPPLY    AND    PROSPERITY 


MISCELLANEOUS 


Amalgamated  Copper 

Amer.  Car  &  Foundry 

Preferred 

American  l,ocomotive 

Preferred 

Amer.  Smelting  &  Refining. 

Preferred 

American  Sugar   Refining... 

Preferred 

Brooklyn  Rapid  Transit 

Colorado  Fuel  &  Iron,  com.. 

Consolidated  Gas  (N.  Y.) 

General  Electric 

Metropolitan  Street  Railway 
National  I,ead 

Preferred 

People's  Gas,  I,ight  &  Coke- 
Pullman  Co 

Tenn.  Coal, Iron  &  R.R.,com 
V.  S.  Rubber 

First  Preferred 

U.  S.  Steel 

Preferred 

Western  Union  Telegraph... 

Average  24  stocks  (17co's) 
14  stocks  (llco's) 

Total  average  RR.  &  Misc. 
64  stocks  (45  co's) 
54  stocks  (39  co's) 


(b) 
(b) 
(b) 
(c) 
(c) 
(b) 
(b) 
116 

100^8 

21 

19K 
1495^ 

29K 
100^ 

245^ 

88 

(a) 
155 

25 

20 

70'A 

(c) 

(c) 

85 


Company  was  not  formed  until  a  1897;  bl899;  c  1901.    *  Includes  Union  Pacific 

preferred,  initial  sales  of  which  were  made  at  an  average  price  of  62^  in 

Feb.  1898. 
e  Price  as  of  February,  1897.     First  sale  after  reorganization  in  1896. 
/  New  stock  not  on  market.     Price  given  is  the  equivalent  of  16K  in  old  stock. 
g  Price  as  of  March,  1897.     First  sale  after  reorganization  in  1896, 
h  Stock  was  cornered  on  May  9,  1901,  and  sales  for  "  cash  "  were  made  on  that 

day  as  high  as  1000. 
k  Price  at  Philadelphia  Stock  Exchange. 
/  Price  as  of  April,  1897. 
"  Stock  of  present  company  not  on   market.     Price  given  is  the  equivalent  of 

9^  in  stock  of  old  company. 
p  Initial  sales  were  made  at  61^8® 63^  in  February,  1898. 


CONCLUSION  233 

During  the  three  months  since  the  above  tables 
were  prepared  the  prices  of  bonds  have  decHned  an 
average  of  about  one-half  point  and  stocks  an  average 
of  about  10  points — to  February  2,  1907. 

These  tables  show  that  while  the  prices  of  the 
stocks  of  railroads  rose  an  average  of  152%,  in  10  years, 
the  prices  of  railroad  bonds  rose  only  16%  ;  that  while 
the  prices  of  stocks  rose  26  9f,  in  five  years,  the  prices 
of  bonds  declined  3%;  and  that  while  the  prices  of 
stocks  averaged  the  same,  in  November,  1906,  as  in 
November,  1905,  the  prices  of  bonds  declined  3%. 

Based  upon  the  tables,  similar  statements  can  be 
made  as  to  the  prices  of  bonds  and  stocks  of  the  indus- 
trial and  other  concerns  included  under  the  head  "Mis- 
cellaneous." 

Of  course  these  averages,  of  practically  all  of 
the  stocks  and  bonds  actively  traded  in  on  the  New 
York  Stock  Exchange,  furnish  no  fair  test  of  the 
real  decline  in  bonds  the  security  of  which  has  been 
unquestioned  at  all  times  during  the  last  ten  years. 
Many  of  the  railroads  were  reorganized  in  1896,  or  just 
previously.  Some  of  these  were  the  Atchison,  whose 
stock  has  risen  700%,  since  1896,  the  Reading,  whose 
stock  has  risen  680%,  since  1896,  and  234%,  since  1901, 
the  Northern  Pacific,  whose  stock  has  risen  1630%, 
since  1896,  and  the  Union  Pacific,  whose  stock  has 
risen  11207r,  since  1896,  and  81%.,  since  1901.  The 
bonds  of  these  roads  were  largely  in  the  speculative 
stage,  in  1896,  and  partly  so,  in  1901.  The  prices  of 
the  bonds  of  such  well  established  roads  as  the  Penn- 
sylvania, Illinois  Central  and  Lake  Shore  were  all 
lower  in  1906  than  in  1896. 


234  GOLD    SUPPLY    AND    PROSPERITY 

Beyond  question,  the  prices  of  bonds  whose  secur- 
ity has  been  ample  at  all  times  have  been  declining  for 
10  years.  This  is  a  most  remarkable  fact  considering 
the  great  rise  in  the  prices  of  stocks  during  this  time. 

6.  Rising  prices  increase  cost  of  materials  and  of 
operation  and  tend  to  decrease  the  profits  of  concerns 
selling  at  fixed  prices. 

About  two  years  ago  Mr.  Edwin  Lefevre  gave  us 
a  very  interesting  story  about  Wall  Street  entitled 
"The  Golden  Flood."  It  gave  an  account  of  a  youth 
who,  in  a  few  weeks,  deposited  $50,000,000  of  gold  at 
the  assay  office.  Investigation,  made  quietly  by  some 
of  New  York's  richest  men  who  were  becoming  fright- 
ened at  the  flood  of  gold,  developed  that  the  young 
man  was  a  metallurgist  who  had,  supposedly,  discov- 
ered the  secret  of  transmuting  base  metals  into  gold. 
Discussing  matters  with  these  rich  men  it  was  decided 
that  no  great  harm  would  be  done  if  no  more  than 
$250,000,000  were  added,  in  this  way,  to  the  gold  sup- 
ply and  if  the  secret  of  production  were  not  known. 
It  was  stated  that  the  richest  man  in  the  world,  know- 
ing these  facts,  quickly  concluded  what  would  be  the 
effects  of  an  enormous  increase  in  the  gold  supply  and 
as  quickly  began  to  sell  millions  of  gold  bonds  and  to 
buy  stocks. 

In  a  general  way  this  "richest  man"  acted  wisely 
Certainly  he  did  so  in  selling  his  gold  bonds.  If,  how- 
ever, he  proceeded  to  buy  stocks  indiscriminately  he 
may  have  made  great  mistakes.  Thus,  during  the  past 
year,  as  shown  by  the  above  tables,  the  prices  of  stocks 
declined  even  faster  than  did  the  prices  of  bonds, 
although  the  flood  of  gold  was  greater  than  ever  be- 


CONCLUSION  235 

fore  and  prices  of  commodities  rose  rapidly.  It  is, 
then,  entirely  unsafe  to  jump  to  the  conclusion  that 
more  gold  means  higher  prices  for  all  stocks. 

The  one  great  class  of  companies  the  prices  of 
whose  products  are  usually  fixed  by  law  is  that  of  public 
service  corporations — street  railway,  gas,  water,  elec- 
tric light,  telephone,  etc.,  companies.  Unless  invention 
and  cheaper  cost  of  service  can  keep  pace  with  gold 
depreciation  the  net  earnings  of  these  corporations  will 
diminish  to  the  vanishing  point,  whether  the  price  of 
gas  be  fixed  at  80  cents,  instead  of  $1,  and  car  fares  at 
3,  instead  of  5  cents.  The  labor  is  the  more  important 
item  of  cost  with  street  railway  companies  and  the 
material  and  supplies  item  the  more  important  with  the 
lighting  companies.  It  will  be  very  difficult  to  get 
laws  and  ordinances  passed  permitting  these  corpora- 
tions to  charge  higher  prices  for  their  services  and  pro- 
ducts. At  the  present  moment  nearly  every  legisla- 
ture is  considering  bills  to  compel  lower  prices  or  bet- 
ter service  from  these  companies.  The  future  of  the 
stocks,  especially  of  the  highly  watered  stocks  of  pub- 
lic service  corporations,  is  not  bright. 

Our  railroads  are  but  little  better  situated  than 
our  public  service  corporations.  While  they  are,  ex- 
cept for  restrictions  on  passenger  rates  in  some  states, 
for  the  most  part  nominally  free  to  advance  rates  with 
increasing  cost  of  operation,  they  are,  by  public  opin- 
ion, virtually  prevented  from  advancing  rates  directly 
and  openly.  The  late  Samuel  Spencer,  president  of  the 
Southern  Railway,  well  stated  the  situation,  in  a  speech 
at  Montgomery,  Alabama,  on  October  25,  1906.  In  it 
he  said: 


236  GOLD    SUPPLY    AND    PROSPERITY 

"With  the  increased  prosperity  of  the  country  have 
come — and  properly — ^higher  wages  and  also  higher 
prices  for  everything  the  carrier  must  buy.  Instead  of 
$9  per  thousand  feet  for  bridge  and  shop  lumber  in 
1896,  the  cost  is  now  $16  to  $20,  or  more;  instead  of  $18 
per  ton  for  steel  rails,  the  cost  is  now  $28  to  $29;  in- 
stead of  $11,000  each  for  locomotives,  the  cost  is  now 
from  $16,000  to  $20,000;  instead  of  $475  for  box  cars, 
the  cost  is  now  $800,  and  so  on  throughout  the  long  list 
of  necessary  railroad  purchases. 

The  grave  economic  conditions  confronting  our 
railroads  are  shown  by  these  statements.  That  they 
are  very  grave  is  further  shown  by  a  comparison  of 
gross  and  net  earnings.  A  few  years  ago  net  were  in- 
creasing more  rapidly  than  gross  earnings.  During  the 
last  four  months  of  1906,  the  rate  of  increase  was 
greater  in  the  gross  than  in  the  net  earnings.  Thus,  in 
December,  1906,  gross  earnings  increased  8.68%  and 
net  earnings  only  2.11%,  on  the  93  roads  reporting. 
This  change  occurred  under  most  favorable  condi- 
tions as  to  weather  and  amount  of  freight  offered.  It 
simply  means  that  the  railroads  have  reached  a  point 
where  all  of  the  savings  possible  from  improved  road 
beds,  rolling  stock  and  methods  of  operation  are  over- 
come, and  more  than  overcome,  by  the  increased  cost 
of  materials,  supplies,  labor  and  rolling  stock. 

At  the  present  time  (February  8,  1907),  the  execu- 
tives of  29  railroads  are  conferring  in  New  York  on  two 
important  propositions:  (1)  To  induce  the  Interstate 
Commerce  Commission  to  amend  its  circular  of  Feb- 
ruary 1,  regulating  the  form  and  manner  of  publishing 
and  issuing  tariffs  and  joint  rates  which  are  to  become 


CONCLUSION  237 

effective  March  1.  (2)  To  increase  commodity  rates 
10%  by  increasing  the  minimum  load  for  a  car.  Of 
course  such  increase  can  be  made  only  with  the  con- 
sent of  the  Interstate  Commerce  Commission.  Con- 
sidering the  present  temper  of  the  people  it  is  improb- 
able that  either  the  railroad  executives  or  the  Inter- 
state Commerce  Commission  will  dare  raise  rates 
much.  We  are,  perhaps,  just  at  the  beginning  of  a 
long  struggle  on  this  point.  In  any  case  it  is  not  likely 
that  rates  per  ton-mile  will  ever  again  be  as  low  as  they 
have  been  during  the  past  few  years. 

7.  Rising  prices  tend  to  increase  the  net  earnings 
of  all  concerns  that  own  their  own  sources  of  materials 
and  supplies. 

This  applies  to  railroads  and  pubUc  service  corpo- 
rations, as  well  as  to  manufacturing  and  mining  com- 
panies.' As,  however,  the  tangible  assets  of  public  ser- 
vice corporations  are  ordinarily  comparatively  small, 
the  benefits  from  their  increase  in  values  are  usually 
more  than  offset  by  the  losses  from  the  increase  in  the 
cost  of  operation.  If,  as  in  the  case  of  the  Great 
Northern  railroad,  extremely  valuable  ore  lands  are 
owned,  their  increasing  value  may,  for  some  years,  ex- 
ceed the  increasing  expenses  of  operation.  Increasmg 
taxes  must,  however,  be  considered. 

Most  manufacturing  concerns  are  free  to  change 
prices  with  changing  cost  of  materials  and  labor.  But, 
as  the  prices  of  materials  usually  rise  quicker  than  do 
the  prices  of  finished  products,  manufacturing  concerns 
in  which  the  cost  of  materials  constitutes  the  chief  cost 
of  production,  are  likely  to  be  at  a  disadvantage  during 
periods  of  rising  prices.    If  they  own  their  own  sources 


238  GOLD    SUPPLY    AND    PROSPERITY 

of  materials  and  supplies,  as  do  some  of  the  larger  steel, 
paper,  leather,  match,  rubber,  etc.,  companies,  they  will 
not  suffer  from  this  fact.  It  should  not,  however,  be 
forgotten  that  the  prices  of  the  products  of  these,  as 
of  many  other  manufacturing  concerns  in  this  country, 
are  highly  artificial,  because  of  tariff  duties.  Perhaps 
half  of  the  net  profits  of  our  steel,  sugar,  lead,  paper, 
leather  and  of  many  other  trusts  are  dependent  upon 
the  retention  of  tariff  duties.  The  uncertainties  of 
tariff  legislation  will,  therefore,  be  largely  reflected  in 
the  securities  of  these  corporations.  As  a  rule,  the  as- 
sets of  this  class  of  corporations  will  tend  to  increase 
even  more  rapidly  than  will  the  cost  of  living.  Manu- 
facturing concerns,  dependent  for  materials  and  sup- 
plies mainly  upon  other  concerns  do  not  occupy  an 
enviable  position,  especially,  as  is  often  the  case,  if  they 
have  to  compete,  in  finished  products,  with  concerns 
that  own  mines  and  produce  their  own  raw  materials. 

8.  Rising  prices  of  commodities  tend  to  cause  the 
prices  of  tangible  property  to  rise. 

Of  course,  if  lumber,  bricks,  glass,  plumbing  sup- 
plies, paints  and  all  other  materials  that  go  into  build- 
ings cost  more,  houses,  factories,  stores,  fences,  bridges, 
tunnels  and  other  structures  and  improvements  will 
cost  more  and  must  finally  sell  at  higher  prices.  Land, 
mines  and  forests  will  rise  in  price  simply  to  keep  their 
relative  exchange  values  with  gold,  if  for  no  other  rea- 
son. Thus,  if  an  acre  of  land  sells  at  $1^0,  when  gold 
has  a  certain  exchangeable  value  with  other  things  pro- 
duced, this  acre,  to  keep  its  parity  with  all  other  things 
bought  and  sold,  must  sell  at  $200,  when  gold  has  lost 
half  of  its  exchange  value.    There  are  certain  other  fac- 


CONCLUSION  239 

tors  that  interfere  to  prevent  the  maintenance  of  this 
parity  at  all  times.  Thus,  because  the  prices  of  com- 
modities and  labor  do  not  rise  simultaneously,  when 
gold  is  depreciating,  the  distribution  of  products  is 
different,  when  prices  are  rising,  from  what  it  is  when 
prices  are  stable  or  falling.  Interest  rates  are  also  less 
perfectly  adjusted  at  such  times  and  result  in  giving 
less  of  the  product  to  creditors  and  more  to  debtors. 
For  these  reasons  the  distribution  of  products  is,  as  is 
shown  elsewhere,  materially  different  from  what  it  is 
under  normal  conditions  and  stable  prices.  Wage- 
earners,  for  example,  although  they  may  get  more 
money,  absorb  less  product.  Their  incomes  being  in- 
sufficient to  purchase  as  much  as  formerly,  economy 
must  be  practiced.  They  will,  perhaps,  wear  less 
woolen  and  more  cotton  clothes;  eat  less  meat  and 
more  bread;  and  occupy  less  house  space.  For  these 
reasons  cotton  and  wheat  lands  may  rise  faster  than 
will  most  other  lands  while  city  lots  will  rise  slower 
than  under  normal  conditions.  In  many  other  ways 
the  balance  of  values  is  disturbed  by  rising  prices. 
Other  factors,  however,  interfere  with  these  factors. 
When  lumber  gets  too  high  buildings  will  be  con- 
structed largely  of  cheaper  materials — cements  pos- 
sibly. Or  the  removal  of  the  tariff  on  lumber,  lead, 
glass,  nails,  tin  plate,  etc.,  may  temporarily  and  rela- 
tively cheapen  building  materials  with  consequent 
effects  upon  the  prices  of  timber  lands  and  lead 
mines.  As  a  rule,  though,  timber  and  mining  lands 
will  rise  early  and  rapidly,  as  a  result  of  the  great  build- 
ing enterprises  that  come  from  business  expansion. 
Thi2  they  have  been  doing  in  this  country  for  ten  years. 


240  GOLD     SUPPLY    AND    PROSPERITY 

The  metals — copper,  tin,  lead,  etc. — have  risen  much 
more  than  have  average  prices.  Iron,  steel,  coal  and 
oil  also  rose  early  and  rapidly. 

9.  Rising  prices  of  commodities  and  property  tend 
to  increase  the  values  of  the  securities  of  corporations 
holding  commodities  or  property. 

The  truth  of  this  statement  is  so  self-evident,  in 
view  of  what  has  gone  before,  that  it  need  not  be  fur- 
ther explained.  Investors  should  always  weigh  care- 
fully the  relative  importance  of  the  factors  affecting 
values,  never  forgetting  the  effect  of  possible  changes 
in  the  tariff,  in  local  taxes,  and  of  legislation  regulating 
rates — changes  that  will  partly  be  the  indirect  result  of 
rising  prices. 

10.  Rising  prices  and  cost  of  living  necessitate 
higher  money  wages. 

Wholesale  prices  have  risen  fully  50'/^  in  this 
country,  and  probably  30%  in  England  and  other  coun- 
tries, in  ten  years.  Retail  prices  and  actual  cost  of  liv- 
ing, have,  perhaps,  risen  40'/  ,  in  this  country,  and  20 
or  25%,  in  other  countries.  Meanwhile  average  wages 
have  certainly  not  risen  more  than  20/f ,  and  possibly 
only  l5'/f ,  in  this  country,  not  more  than  5  or  10'/  .  in 
England  and  Europe  and  perhaps  20%,  in  Japan  and 
in  South  Africa  and  other  sparsely  settled  countries. 
Partly  because  of  good  crops,  and  partly  also,  per- 
haps, because  of  tariff  trusts,  both  prices  and  wages 
have  risen  quicker  and  faster  in  this  than  in  most  other 
countries.  Wages,  that  is  money  wages,  have  risen 
faster  for  two  reasons:  (1)  Because  prices  have  risen 
faster,  thus  necessitating  a  greater  rise  in  wages;  (2) 
Because  industry  is  here  conducted  on  a  larger  scale 


CONCLUSION  241 

than  in  most  other  countries.  When  industry  is  con- 
ducted largely  by  great  corporations,  owned  by  hun- 
dreds and  thousands  of  stockholders,  of  which  a  half 
dozen  are  office  holders,  there  is  less  personal  interest 
and  opposition  to  advancing  wages  than  when  indus- 
try is  conducted  on  a  small  scale  and  when  any  ad- 
vances made  will  come  largely  out  of  the  pockets  of 
those  who  make  or  concede  them.  That  there  are 
many  exceptions  to  this  rule,  or  supposed  rule,  is  cer- 
tain. Many  men,  as  individuals  and  private  employ- 
ers, will  concede  more  to  their  employes  than  the 
law  of  supply  and  demand  would  warrant.  It  is  safe 
to  say,  however,  that,  as  a  rule,  men  will  look  more 
sharply  after  their  own  interests  than  they  will  after 
the  interests  of  stockholders.  Besides,  as  a  rule,  big 
corporations  produce  more  cheaply  than  small  com- 
panies and  individuals  and  can,  therefore,  afford  to 
pay  higher  wages. 

11  and  12.  As  rising  prices  do  not  mean  increased 
profits  to  all  concerns,  many  employers  will  not  con- 
cede higher  wages  and  many  strikes  will  result. 

As  explained  previously,  rising  prices  increase  the 
cost  of  operation  of  railroad  and  public  service  corpora- 
tions, and  the  cost  of  production  of  m.anufacturing  con- 
cerns. When,  as  in  the  cases  of  most  public  service 
companies,  and  of  some  manufacturing  concerns,  rates 
and  prices  are  fixed  by  law  or  custom,  increasing  cost 
of  operation  means  declining  net  profits.  Because  the 
cost  of  living  is  rising,  and  because  many  industries  can 
afford  to  pay  higher  wages,  the  general  wage  scale 
will  be  rising.  Wages  in  all  lines,  must,  therefore,  ad- 
vance, even  if  many  operating  companies  fail  and  have 


242  GOLD    SUPPLY    AND    PROSPERITY 

to  be  reorganized.  Labor  troubles  are  almost  certain 
to  be  numerous  for  many  years  to  come,  especially  in 
connection  with  corporations  and  individuals  in  the  un- 
fortunate industries  that  cannot  recoup  the  losses 
caused  by  rising  prices  for  materials. 

13.  Because  wages  will  rise  slower  than  prices 
there  will  be  dissatisfaction  and  unrest  among  wage 
and  salary  earners. 

As  stated  before,  the  cost  of  living  has  probably 
risen  40%  in  this  country,  while  wages  have  risen  not 
to  exceed  20%  in  ten  years.  Probably  the  best  test  of 
the  general  rise  in  money  wages  is  furnished  by  the 
statistics  of  railroads,  made  yearly  to  the  Interstate 
Commerce  Commission.  From  1896  or  1897  to  1904 
these  showed  an  average  increase  of  less  than  10%. 
The  rise  since  1904  will,  perhaps,  average  nearly  10%. 
As  about  half  of  the  employes  consist  of  skilled  and 
half  of  unskilled  and  half  of  organized  and  half  of  un- 
organized labor,  the  average  rise  of  wages  of  railroad 
employes  is  likely  to  be  a  fair  average  for  the  whole 
country. 

Wages,  then,  have  risen  only  20%  while  the  cost 
of  living  has  risen  40%.  This  means  that  whereas 
$1.40  is  now  required  to  buy  what  $1  bought  in  1896, 
the  average  workingman  has  only  $1.20  with  which  to 
purchase  what  sells  for  $1.40.  It  means  that  there  is  a 
tremendous  "rake-off"  left  for  somebody.  As  there  are 
about  30,000,000  workers  in  this  country,  receiving  an 
average  of  about  $600  each  per  year,  the  total  wage 
bill  amounts  to  about  $18,000,000,000.  If  this  is  120% 
of  what  the  same  earners  would  have  received  in  1896, 
they  would  then  have  received  $15,000,000,000.    But  to 


CONCLUSION  243 

buy  what  they  could  then  have  bought  with  $15,000,- 
000,000  wage  earners  today  would  have  to  have  $21,- 
000,000,000.  Hence  the  difference  between  what  our 
wage  earners  actually  get  and  what  they  should  get, 
on  the  1896  basis,  is  $3,000,000,000  a  year.  This 
amount  represents,  approximately,  the  "rake-off"  that 
must  go  to  somebody.  It  is  the  price  our  workers  and 
consumers  are  paying  for  the  kind  of  prosperity  that 
we  see  on  all  sides.  As  to  who  gets  it  we  will  not  un- 
dertake to  say.  The  main  fact  is  that  this  vast  amount, 
through  a  price-and-wage  juggle  for  which  nobody  in 
particular  is  to  blame,  is  yearly  extracted  from  the 
pockets  of  our  workers  and  spenders.  It  is  this  $3,000,- 
000,000  a  year  that  is  making  riches  for  certain  people 
or  certain  classes.  It  is  the  unfairness  and  injustice 
measured  by  this  $3,000,000,000  that  is  largely  respon- 
sible for  the  prevailing  discontent  that  is  breaking  out 
in  so  many  places  and  ways.  More  than  anything  else 
this  fundamental  injustice  in  the  distribution  of  pro- 
ducts is  creating  unrest  and  dissatisfaction. 

14.  Rising  prices  encourage  speculation  and  dis- 
courage honest  industry. 

This  statement  is  almost  axiomatic.  When  prices 
are  rising,  merchants  are  carrying  unusually  large 
stocks  of  goods,  builders  are  constructing  more  houses 
than  usual,  farmers  are  buying  more  land  than  they 
need,  business  is  artificially  stimulated  and  speculation 
is  rife  in  all  classes  of  commodities  and  property  that 
are  fit  subjects  of  speculation.  When  speculators  in 
real  estate  and  commodities  are  waxing  fat  and  reap- 
ing great  profits,  economy  and  thrift  are  at  a  discount 
and  extravagance  and  idleness  are  at  a  premium.  Every 


244  GOLD    SUPPLY    AND    PROSPERITY 

man  is  hoping  if  not  trying  to  live  by  his  wits  rather 
than  by  his  honest  effort. 

15.  Thus  rising  prices,  by  diminishing  the  in- 
comes of  "safe"  investments  in  "gilt-edged"  bonds  and 
stocks  and  by  increasing  the  profits  of  speculators,  en- 
courage extravagance,  recklessness,  thriftlessness,  in- 
difference, dishonesty  and  graft. 

16,  17,  18,  19,  20,  21  and  22  will  not  be  repeated 
here  but  will  be  discussed  together.  They  follow  natu- 
rally from  what  has  preceded.  That  rising  prices  and 
high  interest  rates  work  to  the  advantage  of  the  debt- 
ors— the  rich — and  to  the  disadvantage  of  the  creditors 
— the  middle  classes — and  that  they,  therefore,  result 
in  rapidly  concentrating  wealth  in  the  hands  of  a  com- 
paratively few  is  reasonably  certain.  They  lead  natur- 
ally, then,  to  periods  of  unrest,  discontent,  agitation, 
strikes,  riots,  rebellions  and  wars.  Important  results 
in  the  financial,  industrial  and  commercial  world,  as 
well  as  great  changes  in  the  political,  social  and  relig- 
ious world  can  be  traced  to  rising  prices  and  a  depre- 
ciating standard  of  value.  These  effects  have  been 
traced  and  commented  upon  by  many  writers  and  his- 
torians. Such  discussion  was,  perhaps,  more  general 
a  few  years  after  the  discovery  of  gold  in  California 
and  Australia  than  at  the  present  time.  We  may  be 
certain,  though,  that  a  repetition,  during  the  next  ten 
years,  of  what  has  happened  to  prices,  during  the  last 
ten  years,  will  lead  to  results  that  will  arouse  the  most 
widespread  interest  and  discussion.  Before  referring 
to  some  of  these  discussions  a  brief  explanation  of  who 
constitute  our  chief  creditors  and  debtors  will  be  at- 
tempted. 


CONCLUSION  245 

Mr.  Bryan  and  many  of  his  silver  and  greenback 
friends  nearly  overturned  this  country,  a  few  years  ago, 
in  their  efforts  to  save  us  from  an  appreciating  dollar 
and  falling  prices.    They  called  it  the  robber  dollar ;  the 
dollar  that  robs  the  poor  and  gives  to  the  rich.     They 
assumed  that  the  poor  were  the  debtors  and  the  rich 
the  creditors.     In  this  they  were  clearly  mistaken.     It 
is  probable  that  less  than  one-tenth  of  the  debts  of  this 
country  are  owed  by  persons  worth  less  than  $1,200. 
although  fully  75 7r  of  the  people  possess  less  than  this 
average  per  capita  of  wealth.     The  great  mass  of  the 
people  cannot  enjoy  the  rich  man's  privilege  of  being  a 
debtor.     Of  course  a  poor  man  may  run  up  a  bill  at 
the  store  for  a  week,  or  possibly  for  a  month,  if  his 
wages  are  paid  monthly.     This  fact,  however,  seldom 
puts  him  in  the  debtor  class.    The  accruing  wages  due 
him  make  him  a  creditor.     Unless  his  store  bill  at  the 
end  of  the  week  exceeds  his  wages  he  has  been  a  cred- 
itor all  the  time.     Likewise,  all  who  have  money  in 
savings  or  other  banks  or  who  hold  insurance  policies 
are  creditors.    There  are  probably  three  times  as  many 
people  in  the  net  creditor  as  in  the  net  debtor  class. 

This  being  true,  the  appreciating  dollar  does  not 
rob  the  poor  and  give  to  the  rich ;  it  robs  the  rich— the 
great  debtor  class— and  gives  to  the  poor— the  great 
creditor  class.  It  was  largely  because  of  this  fact, 
made  reasonably  clear  to  wage  earners,  policyholders 
and  depositors  in  1896,  that  Mr.  Bryan  did  not  get 
either  the  sympathy  or  the  votes  of  the  majority  of  the 
people.  If,  as  he  supposed,  the  majority  of  the  people 
had  been  debtors,  rather  than  creditors,  the  result  of 


246  GOLD    SUPPLY    AND    PROSPERITY 

the  1896  election  might  have  been  very  different  from 
the  actual  result. 

Since  1896,  the  dollar  has  been  shrinking  and 
prices  have  been  rising.  As  a  result  we  have  had  "pros- 
perity," such  prosperity  as  the  world  never  saw  before, 
unless  possibly  during  the  gold  inflation  period  from 
1850  to  1860,  when  all  wealth  doubled  in  value.  There 
is  no  disputing  the  fact  that  we  have  had  wonderful 
prosperity  since  1896.  "We"  means  the  nation  as  a 
whole.  There  has  been  a  marvelous  increase  in  our 
total  wealth  in  the  last  ten  years. 

But  who  is  getting  the  bulk  of  this  increase — Mr. 
Bryan's  poor  debtors?  Not  at  all.  The  rich  debtors 
are  pocketing  the  great  bulk  of  this  great  depreciation 
loss.  The  rich  own  the  stocks  of  our  banks,  our  insur- 
ance companies,  our  bonded  railroads,  our  bonded  pub- 
lic service  corporations  and  our  mortgaged  real  estate 
in  city  and  country.  These  are  our  great  debtor 
classes.  At  this  moment  they  probably  owe  $30,000,- 
000,000,  at  least  two-thirds  of  which  is  owed  to  bank 
depositors,  policyholders  and  bondholders,  the  major- 
ity of  whom  are  worth  less  than  $5,000  each. 

This  depreciating  dollar  suits  these  rich  debtors 
"to  a  T."  It  possesses  a  subtle  alchemy  that  enables 
them  to  extract  wealth  from  the  poor,  honest  workers, 
not  only  without  the  traditional  small  "squawk"  that 
accompanies  the  extraction  of  wealth,  even  by  indirect 
taxation,  but  it  accompanies  the  extraction  with  a  feel- 
ing of  exl\ilaration  that  makes  the  victim  enjoy  the 
process  and  have  hallucinations  of  prosperity.  This 
depreciating  dollar  is  easily  the  slickest  device  ever  in- 
vented for  enabling  the  rich  to  absorb  the  earnings  and 


CONCLUSION  247 

wealth  of  the  comparatively  poor.  Observe  how  it 
works ! 

The  hard-working,  saving  people  put  their  money 
into  banks  and  policies.  The  stockholders  of  these 
corporations  take  these  honest,  full-value  dollars  and 
invest  them  in  bonds,  stocks  and  notes.  They  pay  the 
depositors  and  policyholders  3  or  3^%  interest.  At 
the  end  of,  say,  ten  years  the  depositor  or  policyholder 
calls  for  his  money.  He  receives  it  back  in  shrunken 
dollars  that  have  lost  one-third  of  their  value.  The 
stockholders  have  abstracted  the  other  third  just  as 
much  and  as  surely  as  did  the  olden  kings  who  clipped 
off  a  third  of  the  gold  or  silver  from  the  coins  of  their 
realms  and  who  then  compelled  their  subjects  to  re- 
ceive the  clipped  coins  as  full  coins  in  payment  of 
debts. 

Mr.  Bryan  may  not  have  known  of  the  alchemy  in 
a  depreciating  dollar  any  more  than  the  fisherman  in 
the  Arabian  Nights  knew  of  the  genii  in  the  bottle. 
He  may  not  have  know  that  his  dollar  would  not  only 
still  further  impoverish  the  poor,  but1:hat  it  would  pro- 
duce the  greatest  crop  of  millionaires  and  embryonic 
billionaires  the  world  ever  saw.  The  depreciating  dol- 
lar, however,  is  faithfully  fulfilling  the  Scriptural  dec- 
laration— *'For  unto  every  one  that  hath  shall  be  given, 
and  he  shall  have  abundance;  but  from  him  that  hath 
not  shall  be  taken  away  even  that  which  he  hath." 

Gold  Depreciation  Literature  in  the  Fifties 
A  big  crop  of  gold  depreciation  literature  was  har- 
vested during  the  gold  inflation  period  following  the 
discovery  of  gold  in  California  and  Australia.     The 


248  GOLD    SUPPLY    AND    PROSPERITY 

subject  was  so  well  threshed  out  then  by  able  men  that 
it  is  worth  while  to  mention  some  of  the  writers  and 
to  quote  some  of  their  conclusions. 

Mr.  Frederick  Scheer,  of  London,  wrote  a  pam- 
phlet in  1852,  "On  the  Effects  of  the  Californian  and 
Australian  Gold  Discoveries." 

P.  J.  Stirling,  F.  R.  S.  E.,  of  Edinburgh,  in  1853, 
wrote  a  book  on  "The  Australian  and  Californian  Dis- 
coveries, and  Their  Probable  Consequences." 

Mr.  StirHng  agrees  with  Hume  that,  as  a  result  of 
the  new  gold,  "production,  in  all  the  departments  of 
industry,  agricultural  and  manufacturing,  will  be  pow- 
erfully excited  and  stimulated"  and  that  "the  country 
will  rapidly  advance  in  material  prosperity."  But  Mr. 
Stirling  does  not  think  that  all  of  the  consequences  of 
"the  great  monetary  changes  upon  which  we  seem  now 
about  to  enter"  will  be  beneficial.  "During  the  pro- 
gressive development  of  these  changes,"  he  says,  "there 
will  be  a  fearful  breaking  up  of  all  the  existing  rela- 
tions of  property.  Before  the  revolution  is  accom- 
plished, much  suffering  must  be  endured  by  large 
classes  of  the  community."  He  quotes  "Harris  on 
Money  and  Coins"  as  to  the  effect  of  a  sudden  flux  of 
money.  Mr.  Harris  argues  that  because  of  the  reduced 
values  of  taxes  and  rents  both  the  government  and  the 
nobility  will  grow  poorer  and  weaker.  "The  govern- 
ment," he  says,  "being  thus  weakened  and  distressed, 
disorders  will  inevitably  arise." 

One  of  the  best  books  brought  out  by  gold  dis- 
coveries in  California  and  Australia  was  by  Michael 
Chevalier,  member  of  the  Institute  of  France,  "On  the 
Probable  Fall  in  the  Value  of  Gold;  The  Commercial 


CONCLUSION  249 

and  Social  Consequences  Which  May  Ensue,  and  the 
Measures  Which  it  Invites."  It  was  written  in  1856 
and  appeared  simultaneously  in  France  and  England, 
it  having  been  translated  into  English  by  Richard  Cob- 
den,  who  wrote  an  exceedingly  interesting  "Trans- 
lator's Preface."  Here  is  an  extract  from  Mr.  Cobden's 
preface : 

"I  wish  I  could  believe,  that  either  in  the  original 
(where  a  brilliant  style  is  added  to  its  other  merits)  or 
in  the  translation,  this  work  will  be  read  as  widely  as, 
from  its  great  importance,  it  deserves  to  be.  The  very 
topic  forbids  such  a  hope.  It  is,  nevertheless,  a  subject 
on  which  the  early  possession  of  knowledge,  and  the 
exercise  of  forethought,  will  confer  great  advantages 
over  ignorance  and  indifference,  and  afford  the  only 
safeguard  against  probable  loss." 

Space  will  permit  only  a  few  brief  extracts  from 
Mr.  Chevalier's  able  work: 

"I  do  not  believe  I  exaggerate  in  saying  that  the 
transition  period,  which  it  would  be  necessary  to  pass 
over  before  the  fall  had  achieved  its  full  effect,  and 
gold  had  regained  a  somewhat  stable  value,  would  offer 
features  of  instability  and  discontent  characteristic  of 
revolutionary  epochs. 

"It  is  for  society  a  perilous  trial,  especially  when 
the  working  population  find  themselves  among  the 
number  of  the  suffering  classes;  it  is,  in  fact,  they  to 
whom  patience  is  most  difficult,  since  they  possess  the 
fewest  resources.  .  .  .  When  events  are  in  con- 
formity with  right,  it  is  human  nature  generally  to  re- 
sign itself  to  them.     On  the  contrary,  indignation  and 


250  GOLD    SUPPLY    AND    PROSPERITY 

resentment  easily  take  possession  of  a  man  when  he 
feels  that  justice  is  violated  in  his  person.     .     .     . 

"Wages  and  salaries  of  all  kinds  would  eventually 
rise  in  proportion  to  the  enhanced  price  of  commodities, 
but  the  transition  would,  I  fear,  be  accompanied  with 
much  inconvenience  and  suffering.     .     .     . 

"With  respect  to  those  who  have  property  to  in- 
vest, they  would,  as  a  rule,  avoid  those  investments 
which  yield  incomes  of  a  fixed  amount  of  money,  such 
as  dividends  from  the  funds,  interest  from  bonds  and 
mortgages,  as  well  as  annuities,  rent  charges,  ground 
rents,  guaranteed  stock,  etc.,  whilst  property  of  an  ex- 
pansive nature,  which  rises  in  proportion  to  the  depre- 
ciation of  the  currency,  such  as  land,  houses,  shares, 
etc.,  would  be  preferred." 

In  it  he  discusses  the  quantity  theory  of  money  and 
the  effects  of  depreciation  upon  prices,  wages,  interest, 
fundholders,  industry,  etc.  His  conclusions  are  usually 
sane  and  sensible.  He  expressed  surprise  that,  with 
gold  so  abundant,  money  should  be  so  scarce  and  that 
"empty  treasuries  and  impoverished  and  discontented 
people"  should  be  the  universal  complaint. 

The  first  25  chapters  discussed  all  of  the  ordinary 
financial  and  industrial  effects  of  the  increasing  supply 
of  gold.  The  last  chapter  considers  the  "Probable  ef- 
fects on  the  condition  of  different  classes  of  society, 
laborers,  capitahsts,  landlords,  tenants,  public  officers, 
annuitants,  stipendiaries,  debtors,  creditors,  etc."  He 
quotes  from  "Hume's  Political  Discourses"  as  fol- 
lows: 

"In  every  kingdom  into  which  money  begins  to 
fiow  in  greater  abundance  than  formerly,  everything 


CONCLUSION  251 

takes  a  new  face,  labor  and  industry  gain  life,  the  mer- 
chant becomes  more  enterprising,  the  manufacturer 
more  diligent  and  skilful,  and  even  the  farmer  follows 
his  plow  with  greater  alacrity  and  attention." 

At  least  a  half  dozen  other  pamphlets  and  books 
on  the  subject  of  gold  depreciation  were  brought  out 
in  that  period.  One  by  Prof.  W.  Stanley  Jevons  on  "A 
Serious  Fall  in  the  Value  of  Gold  Ascertained,  and  Its 
Social  Effects  Set  Forth,"  in  1863.  Numerous  articles 
on  this  subject  appeared  in  Hunt's  Merchant's  Maga- 
zine from  1851  to  1856.  Extracts  from  some  of  them 
appeared  in  Moody's  Magazine  for  December,  1905. 
Lack  of  space  prevents  these  and  others  from  being 
reprinted  as  an  appendix  to  this  book. 

Apparently  the  suddenness  and  extent  of  the  in- 
crease in  the  supply  of  gold  attracted  greater  attention 
then  than  has  a  much  more  important  but  more  gradual 
increase  at  the  present  time.  That  the  financial,  indus- 
trial and  political  world  of  today  will  soon  be  alive  to 
the  great  importance  of  the  change  now  taking  place  in 
the  value  of  gold  is  reasonably  certain.  That  questions 
connected  with  this  change  may  soon  become  para- 
mount in  politics  is  in  the  realm  of  possibilities. 

The  present  era  of  rapidly  increasing  output  of 
gold  and  of  rapidly  advancing  prices  and  interest  rates 
has  brought  out  but  little  literature  on  this  subject 
and  practically  none  dealing  with  the  political  and 
social  effects  of  depreciating  money. 

Several  professors,  however,  are  known  to  be  delv- 
ing into  past  periods  of  inflation  and  to  be  writing 
upon  this  most  interesting  problem.  One  of  them, 
Prof.  J.  Pease  Norton,  of  Yale,  had  an  article,  in  the 


252  GOLD    SUPPLY    AND    PROSPERITY 

Yale  Review  of  November  15,  1906,  on  "The  Depre- 
ciation of  Gold,"  which  contained  many  novel  and 
startling  statements.  He  not  only  thinks  that  gold 
depreciation  raises  the  rate  of  interest  and  depresses 
the  prices  of  bonds  and  that  it  will  "furnish  several 
vital  financial  problems  during  the  next  five  years," 
but  says  that  "the  political  situation  is  intimately  con- 
nected with  the  subject  of  gold  depreciation"  and  sug- 
gests a  close  connection  between  rising  prices  and  the 
discontent,  dissatisfaction  and  radicalism  that  charac- 
terize the  present  industrial  and  political  conditions. 

Prof.  Norton  puts  the  proposition  that  "If  the  in- 
dustries of  the  countries  of  the  world  are  to  be  subject 
to  so  great  a  source  of  disturbance,  the  problem  may 
soon  require  governmental  control."  In  order  to  regu- 
late the  production  of  gold  and  to  maintain  a  stable 
standard  of  value,  he  suggests  three  courses : 

"(1)   Government  ownership  of  the  gold  industry. 

"(2)  Government  tax  levied  as  a  specific  duty  on 
every  ounce  of  gold  produced,  and  adjusted  in  amount 
so  as  to  produce  stability  by  limiting  output. 

"(3)  Abandonment  of  a  metallic  standard  and  the 
adoption  of  a  tabular  standard,  supplemented  by  an 
extensive  and  adequate  clearing  system,  adjusted  to 
the  needs  of  communities  in  their  exchanges,  local, 
intra-  and  international,  as  to  place,  and  to  variations 
in  discount  rates  by  a  system  of  deferred  clearings,  as 
to  time.  It  is  probable  that,  as  nations  and  legislatures 
are  constituted,  the  latter  remedy  would  be  the  sim- 
plest and  most  practicable." 

Prof.  Norton  thinks  that  "Congress  could  well  af- 


CONCLUSION  253 

ford  to  appoint  a  commission  to  take  testimony  and 
gather  evidence  on  this  important  subject." 

An  even  better  method  of  controlHng  prices,  per- 
haps, is  that  suggested  by  Mr.  A.  B.  Johnson,  in  Hunt's 
Merchant's  Magazine  of  March,  1851.  It  is  very  sim- 
ple and,  apparently,  very  easy  to  put  into  operation, 
either  by  one  country  or  by  many  countries,  acting 
together.  The  problem,  however,  is  not  simple.  Here 
is  the  plan : 

"Government  might  measurably  shield  creditors 
from  such  a  danger,  by  statedly  increasing  the  quan- 
tity of  gold  which  composes  an  eagle;  so  as  to  com- 
pensate in  quantity  from  time  to  time  as  depreciation 
of  value  should  become  certain  and  permanent ;  as  the 
British  Government,  some  years  since,  called  in  the 
guineas  which  had  lost  weight  by  abrasion.  Such  a 
process  would  prevent  the  currency  from  sustaining 
any  great  loss  of  value  at  any  one  time;  and  would  also 
confine  the  loss  of  the  holders  of  the  coin  for  the  time 
being,  without  entailing  it,  and  accumulating  it,  on  re- 
mote debts.  But  governments  are  usually  debtors 
themselves,  and  will  not  be  likely  to  enhance  their 
own  burdens." 


Some  of  the  many  financial,  economic  and  social 
problems  connected  with  the  depreciation  of  gold  have 
been  considered  on  the  preceding  pages.  It  has  been 
fairly  well  demonstrated  that  the  rapidly  increasing 
output  of  gold  leads  to  rising  prices,  rising,  or  high 
interest  rates  and  that,  therefore,  investment  values 
are  shifted  about  in  many  curious  ways.     It  has  been 


254  GOLD    SUPPLY    AND    PROSPERITY 

suggested,  with,  some  reason  and  evidence,  that  the 
depreciation  of  gold  is  indirectly  responsible  for  some 
of  the  political,  social  and  religious  discontent  now 
prevalent  throughout  the  civilized  and  half-civilized 
world.  It  is  not  pretended  that,  either  as  to  argument 
or  facts,  the  conclusions  reached  are  undeniable  and  ir- 
refutable. It  is  believed,  however,  that  they  are  sub- 
stantially correct  and  that  they  will,  at  least,  suggest 
food  for  thought  and,  perhaps,  lead  to  many  valuable 
conclusions  to  the  readers  of  this  book. 

Many  may  infer,  from  the  title  of  this  book,  that 
an  increasing  gold  supply  means  continued  prosperity. 
It  has  been  seen  that  a  rapidly  increasing  output  and 
supply  of  gold  does,  for  a  time  at  least,  give  an  arti- 
ficial stimulus  to  industry  that  has  the  appearance  of 
genuine  prosperity.  That  it  is  not  real  and  wholesome, 
because  not  founded  on  a  just  distribution  of  products, 
has  been  shown.  In  fact  the  prosperity  superinduced 
by  rising  prices  has  many  dark  sides  to  it  at  all  times. 
Some  of  these  are :  speculation  in  stocks,  commodities 
and  real  estate ;  increased  cost  of  production  and  of 
living;  labor  troubles;  general  unrest;  inability  of 
workers  to  purchase,  at  the  high  prices  asked,  the  total 
products  offered  and  needed;  glutted  markets;  closed 
mills ;  and,  if  an  increased  supply  of  gold  is  not  always 
forthcoming,  a  decline  in  prices  that  will  result  in  de- 
pression and  panic.  If,  however,  as  is  probable,  the 
gold  supply  shall  continue  to  increase  for  many  years 
to  come,  we  are  likely  to  have  frequent  and  heavy  de- 
clines in  the  speculative  industries,  followed  by  com- 
paratively slight  and  brief  declines  in  prices  of  com- 
modities, such  as  occurred  in  1857  and  1903,  and  by  a 


CONCLUSION  255 

slowing  down  in  industry  in  general  which  will  be  of 
short  duration. 

While  falling  prices  usually  usher  in  depressions 
and  panics,  they  are  more  normal  and  natural  than  are 
rising  prices.  They  discourage  speculation  and  idle- 
ness and  encourage  economy  and  thrift.  While  they 
are  most  certainly  less  wholesome  and  less  beneficial 
to  industry,  than  stable  prices,  yet  their  evils  are  prob- 
ably less  harmful  to  industry  and  society  than  are  the 
evils  of  rising  prices. 

As  to  the  effect  of  gold  depreciation  on  prosper- 
ity, the  Hon.  George  E.  Roberts,  director  of  the  mint, 
said  in  the  Banker's  Magazine  of  January,  1906  : 

"An  increasing  money  supply  does  not  mean  un- 
interrupted prosperity.  No  supply  can  come  forth  fast 
enough  to  outrun  the  imagination  of  speculators. 
Whatever  may  be  the  original  impulse  to  an  advance 
movement,  if  the  movement  continues,  speculation  will 
become  a  factor  in  it,  and  a  reaction  must  follow.  The 
weakness  of  modern  finance  is  in  the  vast  holdings  of 
marginal  ownership,  and  no  matter  how  much  pros- 
perity or  how  much  money  we  have,  that  condition 
seems  to  remain  much  the  same.  This  practice  of 
using  credit  and  reserves  to  the  utmost  exaggerates 
the  effect  of  every  fluctuation  in  the  supply  of  money. 
After  gaining  nearly  $1,000,000,000  in  cash  in  nine 
years,  it  might  seem  that  the  United  States  could 
spare  $100,000,000  without  a  panic,  but  we  could  not, 
or  the  half  of  it  without  alarm.  Finally,  while  an  ample 
supply  of  so  peculiarly  available  a  form  of  capital  as 
gold  plays  an  evident  part  in  world-developments,  let 


256  GOLD    SUPPLY    AND    PROSPERITY 

it  again  be  said  that  its  work  is  as  a  medium  and  lubri- 
cant.   It  is  not  an  ultimate  form  of  wealth." 

Mr.  Roberts  quotes  Blanqui,  the  French  econo- 
mist, who  said,  about  1840: 

"Everyone  knows  today  that  the  real  advantages 
which  Europe  derived  from  the  discovery  of  the  mines 
of  the  New  World  do  not  come  exclusively  from  the 
abundance  of  the  precious  metals,  but  from  the  culti- 
vation of  the  commodities  for  consumption  which  con- 
stitute the  basis  of  our  exchanges  with  that  country. 
Gold  and  silver  have  disappeared;  cotton,  sugar  and 
coffee  remain.  The  single  discovery  of  the  potato  was 
worth  more  than  all  the  mines  of  Mexico  and  Peru." 

Of  course,  if  more  gold  does  not  mean  more  indus- 
trial prosperity  it  cannot,  in  the  long  run,  mean  more 
prosperity  in  the  security  markets  of  the  world.  This 
fact  is  becoming  increasingly  evident.  Not  only  has 
there  been  a  world-wide  decline  in  bond  values,  as  we 
have  seen,  the  decline  in  the  prices  of  stocks  has  been 
almost  equally  great.  Mr.  Charles  F.  Speare,  in 
Moody's  Magazine  for  February,  1907,  showed 
that,  during  1906,  "a  year  of  the  greatest  industrial 
activity  known  to  all  nations,"  there  was  a  total  shrink- 
age in  security  values  of  $2,000,000,000.  He  credits  the 
losses  mainly  to  earthquakes,  fires,  wars,  socialism,  irri- 
tation of  corporations,  new  taxes,  high  money  rates, 
etc.  Such  a  tremendous  and  universal  shrinkage, 
under  such  industrial  conditions  of  apparent  pros- 
perity, is  certainly  most  remarkable  and  suggests  the 
hollowness  and  artificiality  of  our  present  prosperity. 

In  this  book  we  have  aimed  to  present  some  of  the 
more  important  factors  that  should  be  considered  by 


CONCLUSION  257 

present-day  investors.  To  a  considerable  extent  the 
advantages  and  disadvantages  of  different  classes  of 
investments  have  already  been  adjusted  and  equalized, 
by  higher  interest  rates,  by  lower  prices  of  bonds  and 
by  higher  and  lower  prices  of  stocks.  Thus,  the  oppor- 
tunities to  take  advantage  of  the  depreciating  value  of 
gold  are  passing— the  greatest  have,  indeed,  already 
passed.  Today,  the  man  who  has  money  can  loan  it 
out  and  get  almost  as  much  income  as  he  will  get  if  he 
judiciously  invests  it  in  lands,  mines  or  good  stocks. 
The  man  who  has  to  borrow  before  he  can  invest  will 
lose  nearly  as  much  in  the  high  rate  af  interest  as  he 
will  gain  by  rising  prices.  On  the  other  hand,  the 
prices  of  bonds  have  declined  so  that  an  investor  can 
get  within  1  or  2%  of  as  much  as  he  could  get  by  loan- 
ing his  money  or  by  investing  it  where  it  would  bene- 
fit by  the  increase  in  the  prices  of  real  property.  As, 
however,  the  process  of  adjustment  is  far  from  com- 
plete and  will  not  be  completed  for  many  years,  there 
is  still  a  great  difference  in  investment  returns  from 
different  properties.  Wise  investors,  then,  will  study 
the  gold  factor,  as  they  should  always  study  all  other 
factors  affecting  investments. 

That  this  world-wide  problem  of  the  over-supply 
of  gold  will  soon  be  pressing  for  solution  in  this  and 
in  many  other  countries  can  hardly  be  doubted.  That 
a  solution  will  soon,  or  within  many  years,  be  found 
and  adopted  is  far  less  certain. 


INDEX 


Page 

Aldrich  Report:    On   Prices 76-80,   186 

Appreciation  and  Interest:  by  Prof.  Fislier viii 

Appreciating    Dollar:    and    Interest    Rates,    vi,    17-51;    and 

Prices 17-51,     75-190 

Banker's   Magazine:    On    Gold 255 

Blanqui:   On   Precious  Metals 256 

Bond  Record:   Article   on   Interest  Rates.  .  .' vii 

Bonds:    Prices    and    Gold    Supply,    xiv,    99-111,    154,    163-170, 

221-234;   Prices   British,    224;   New  York  City,   225;    Prices, 

Railroad,  etc.,  227-230;  Miscellaneous,  229;  Government..    230 

Branch,    James   R.:    Gold   and   Prosperitj^ 181-182 

British    Bonds :    Prices 224 

Bryan,   William   J.:   On   Money 245 

Cairnes,  Prof.  J.  E.:  On  Prices 143,   144 

Chart  I,  showing  relation  between  world's   gold  production 

and  prices,  w^ages  and  interest  in  U.  S facing     80 

Chart    II,    showing    relation    between    world's    gold    supply, 

money  in  circulation  in  U.  S.  and  prices  in  U.  S facing     96 

Chevalier,  Michael:   On  Gold 248 

Circulation:    Velocity    of 35 

Clark,  Prof.  John  B.:  On  Money,  Interest  Rates,   Etc 93-97 

Cobden,  Richard:  On  Gold 249 

Coffin,  George  M.:  On  Money  and  Prices 31-33 

Commodities :    and    Money 24 

Conclusion 193-257 

Consols:   Prices   of 169,    224 

Creditors   and   Debtors 21,  246 

Credit  Currency 37 

Debtors    and   Creditors 21,   246 

Demand  and  Supply:   Law 22 

Depreciation  of  Gold:  by  Prof.  Norton 252 

Difficulties  of  the  Quantity  Theory 41-43 

Director  of  the  Mint:  On  Gold  Stock 81 

Dun's  Index  of  Prices 76,  213 

Duty  of  Gold:   by  Walter  S.   Logan 99-111 

258 


INDEX  259 

Effects  of  the   Increasing  Supply  Upon    the   Investor:   by  L. 

Carroll    Root 157-161 

Farquhar,  Henry:  On  Quantity  Theory 41-43 

Fisher,  Prof.  Irving:  On  Interest,  vii.  viii;  On  Quantity 
Theory,  35-38;  Gold  Production  and  Rate  of  Interest ..  121-130 

French    Rentes:    Prices 225 

Gold   Dredg-ing- 5S^    gg^    ^0^    ^2 

Gold  and  Prosperity:   by  James  R.   Branch '....181-182 

Gold   Depreciation   Literature 247 

Golden    Flood:    by    Edwin    Lefevre 234 

Gold  Problem  Solved:  by  George  H.  Shibley ....185-190 

Gold  Production:  and  Prices,  30;  143,  198-214,  250;  The 
World's,    53-74,    196-198;   and   Prosperity,    113-119,    173-178; 

and   Earnings,   237;   by  Roberts ' _'  255 

Gold  Production  and  The  Rate  of  Interest 121-130 

Gold  Supply:  Effects  on  Prices  and  Interest  Rates,  vi,  30; 
On  Discontent,  x;  and  Prices,  xi;  and  Car  Fares,  x'ii;  Sym- 
posium on,  75-190;  and  Prices,  143-149;  by  Scheer,  248;  by 

Stirling,    248;   by  Hume,    248;   by   Chevalier 248 

Gold  Supply  Not  Too  Great:   by  M.  L.   Muhleman ...87-90 

Gold   Symposium iii^    75-190 

Goodbody,  Robert:  On  Effects  of  Gold  Supply .163-170 

How  Gold  Operates:  by  Horace  White 143-149 

Hume:    On   Money 250 

Hunt's  Merchant's  Magazine:   Extracts   from 251 

Hutchens,  J.  P. :  On  Gold  Production 54 

Increasing  Supply  of  Gold:   Symposium 75-190 

Influence  of  the  Increasing  Suppply  on  Prices  and  Interest 

Rates    173-178 

Interest  Rates:  A  Balance  Wheel;  By  Fisher,  viii;  by  Clark, 
viii;  Statistics  of,  76-79;  and  Money  Supply,  by  Clark, 
93-97;  and  Gold  Production,  121-130,  148,  153,  157,  161,  163, 
170,  173,  178,  214,  221;  by  Lewis,  218;  Quoted  in  Cities,  221; 

and    Bond    Prices 221-234 

Interstate  Commerce  Commission:  and  Rates,  236;  on  Wages   242 

Jevons,   Prof. :   On   Gold 251 

Johnson,  A.  B.:  On  Gold 253 

Johnson,  Prof.  Joseph  F. :  Influence  of  the  Increasing  Supply 

on  Prices  and  Interest  Rates 173-178 

Johnson,   Tom  L. :  Cheap  Car  Fares xli 

Keeler,  Bronson  C:  On  Quantity  Theory  of  Money 17-30 

Kemmerer,  Prof.  E.  W.:  On  Quantity  Theory 49-51 

Labor  Cost:  and  Gold 206 


260  INDEX 

Page 

Laughlin,   Prof.:    Quoted 211 

Lefevre,   Edwin:    "The  Golden   Flood" 234 

Lewis,  Charlton  T.:  On  "The  Normal  Interest  Rate" 218-220 

Log-an,  Walter  S.:  On  Duty  of  Gold 99-111 

MacLeod,    Prof.:    On   Banking.  .* 28 

Many    Indeterminable    Factors:    by   M.    L.    Muhleman 39-40 

Materials:    Cost    of 234 

McCuUagh's   Commercial   Dictionary:    On   Interest 166 

Mill,   John  Stuart:   On  Money 26 

Monetary  Commission:  On  Gold  Stock 81 

Money:  Rates  in  Cities 221 

Money,  Interest  Rates  and  Prosperity:  by  Prof.  Clark 93-97 

Money,  Quantity  Theory:   17-51;   John  Law  On,  20;  and  Prices, 

by  Coffin,  31-33;  by  Fisher,  35-38;  by  Muhleman,  39-40;  by 

A.  J.  Warner,  45-48;  by  Kemmerer 49-51 

Moody's    Magazine:    Symposiums    iii,    xv;    Quantity    Theory, 

17;  Symposium  on  The  Increasing  Supply  of  Gold,   75-190; 

Bond   Prices 223 

More    Gold   Means   Higher    "Time"    Money    and   Lower   Bond 

Prices    163-170 

Muhleman,  Maurice  L.:  On  Money,  39-40;  On  Gold  Supply ..  87-90 

Mulhall:   On   Stock  of   Gold 81 

Newcomb,   Simon:   Theory   of  Circulation 35 

Norton,  Prof.  J.  Pease:  On  Gold x,   252 

Over  Supply  of  Gold  Unlikely:  by  Ellis  H.  Roberts 133-140 

Pierre  d'Essars:   On   Bank  Turn-Overs 37 

Precious  Metals:  Value  of .  .  . 256 

Pr'ice:   Defined ^^ 

Prices:    and    Interest    Rates,    vii;    and    Gold    Supply,    xi,    30, 

75-190,    143-149,    173-178,198-214;   Dun's   Index   of,    213; 

1850-1855,     213;     and     Interest,     214-221;     Bonds,     221-234; 

Stocks,  231-232;  Law  of  Supply  and  Demand,  22,  31,  35,  39; 

and  Gold  Supply,  75-190;  Statistics  of,  76-80;  and  Money..    114 

Prices  Vary  With  Money   Supply 49 

Prosperity:  and  Gold  Supply 93-97,   173-178,   181 

Quantity    Theory    of   Money:    xv;    by    Keeler,    17;    by    Coffln, 

31-33;  by  Fisher,  35-38;  by  Muhleman,  39-40;  by  Farquhar. 

41-43-    bv    Warner,    45-48;    by    Kemmerer,    49-51;    Conclu- 

'       ■  198-214 

sion    

Quantity    Theory    Unqualified 45-48 

Railroad    Bonds:    Prices ool "9Q9 

Railroad    Stocks:    Prices ,^, 

Railroads:  Cost  of  Operation,  235-236;  Wages  of 242 

Rents:   and   Gold 


INDEX  261 

Page 

Republican  National  Platform:   On  Money 187 

Ricardo:  On  Quantity  Theory 205 

Rising  Prices:    and    Cost   of   Commodities,    238;    and   Wages, 

241;    and   unrest 244 

Roberts,   Ellis  H.:  Over  Supply  of  Gold  Unlikely 133-140 

Roberts,  George  E. :  Letter  to  Moody's  Magazine,  82;  Quoted, 

187,    212;    On   Gold 255 

Root,  L.  Carroll:  Effects  of  Gold  Supply  On  Investors 157-161 

Sauerback's    Index    of    Prices 213 

Schier,    Frederick:    On    Gold 248 

Securities:  Prices  and  Gold  Supply ..  99-111,  154,  231,  232,  240,  256 

Selwyn-Brown,  A.:  World's  Gold  Production 53-74,   197 

Shibley,  George  H.:   Gold  Problem   Solved 185-190 

Shriver,  E.  J.:  On  Quantity  Theory 206 

Silver:    Price    of x 

Some  Gold  Problems:  by  John  De  Witt  Warner 151-155 

Spallart:  On  Gold  Supply 81 

Speare,   Charles   F. :    Security   Values 256 

Speculation:    and    Rising    Prices 244 

Spencer,   Samuel:    Cost   of   Operation 236 

Standard  of  "Value:  John  Law^  on 20 

Standard   of  Value:   Qualities 20 

Stirling,    P.   J. :    On   Gold 248 

Stocks:  Prices  and  Gold  Supply,  xii-xiv;   99-111,   154;  Prices, 

Railroad     231-232 

Suess,    Dr. :     Gold    Supplies 53 

Vanderlip,  Frank  A.:  Influx  of  Gold  Means  Prosperity ...  113-119 

Value:    Defined,    45;    Intrinsic 47 

Wages:   Statistics   of,    76;   and  Gold,    153,    182,    240;   On   Rail- 
roads      241,    250 

Walker,   Francis   A.:   On   Quantity   Theory 41,   205 

Wall  Street  Journal :   On  Gold 195 

Warner  John  De  Witt:   Some  Gold  Problems 151-155 

White,   Horace:    How   Gold   Operates 143-149 

Williams,   Geo.   Fred.:    Quoted ix 

World's    Gold    Production:    by    A    Selwyn-Brown,    53-74;    by 
Hntchens    54 


IN   PRESS 

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of  sharpers  that  infest  the  land." — Buffalo 
Courier, 

SYNOPSIS  OF   CHAPTERS. 

I.— Salety  and  Security.  II.— Bonds  and  'What  They 
Represent.  III. — Stocks  and  What  They  Are.  IV. —  Ana- 
lyzing Railroad  Securities.  V. — Industrials  and  Tractions. 
VI. — Investments  us.  Speculation.  VII. — "Get-Rich-Quick" 
Schemes.  VIII. — Reorganizations  and  Syndicates.  IX. — 
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The  Pitfalls  of  Speculation 

By  THOMAS  GIBSON 

This  book  deals  exclusively  with  marginal 
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manner  the  causes  of  failure  in  speculation, 
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"  I  do  not  pretend  that  any  prescription  can  be 
written  to  insure  success  nor  that  a  majority  of  the 
public  traders  will  ever  succeed,  but  I  do  maintain 
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erate means.  Mr.  Dow's  efforts  were  news- 
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SYNOPSIS   OF  CHAPTERS. 

I. — Introduction.  II. — Ignorance,  Over  Speculation,  etc. 
III.— Manipulation,  IV. — Accidents.  V. — Business  Methods 
in  Speculation.  VI.— Market  Technicalities.  VII. — Tips. 
VIII.— Mechanical  Speculation.  IX.— Short  Selling.  X.— 
What  500  Speculative  Accounts  Showed.  XI. — Grain  Specu- 
lation. XII. — Suggestions  as  to  Intelligent  Methods.  XIII. — 
Conclusion. 

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UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 

This  book  is  DUE  on  the  last  date  stamped  below 


MAR  0 


4 


05t 


Form  L-9 
20m -1, '42(8510) 


UNIVERSITY  OF  CALIFORNIA 
AT 

LOS  ANGELES 

LIBRARY 


293    Holt  - 
-H74s — 'Ha«  ^^^ — 

190?   suppl  y  _^5d^ 
■"      prosperity. 


HG 
293 
H74g 
1907 


5"  58  01009  5890 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILH 


AA   001  146  013   6 


